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Consolidation Update - Consolidation Loans.ppt

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					             Consolidation Loans
                          Perfect Solution
                                 or
                          Perfect Storm?

SASFAA – Greensboro, North Carolina – February 2006 - Steve Brooks - NCSEAA
History of Consolidation
• 1986 HEA Reauthorization

• Purpose: to help students with multiple
  lenders (loan holders) and high debt to
  consolidate all loans with one lender
  (holder) to allow for one monthly payment
• Creates one new loan, at fixed rate of
  interest based on weighted average of
  loans consolidated into the new loan
Created to address one issue
• Providing an opportunity to consolidate
  multiple debts with one holder
• Fixed interest at weighted average
  (rounded up) produced a slightly higher
  interest rate than underlying loans
  (originally was higher of average or 9%)
• Intent was to provide the opportunity but
  not to provide for continual refinancing –
  to have one monthly payment, not to seek
  a lower interest rate
What it was never intended to do

• Never intended to be a “refinancing”
  mechanism such as home mortgage
  industry
• That is reason for “single holder rule”

• But…as times have changed, and as we
 have experienced a dramatic decline in
 interest rates over the past few years
What Matters in Consolidation
• Amount of loans consolidated
• Then compare the following for the loans
 if not consolidated versus if consolidated
  – Monthly payment
  – Repayment term
  – Interest Rate – fixed in consolidation; variable
    in underlying loans
  – Total Dollars Paid – Principal and interest
Impact of Interest and Time
• The lower the interest, the lower the monthly
    payment
•   The longer the time to pay, the lower the
    monthly payment
•   The longer the time to pay, the higher the total
    payments (if interest rates are the same)
•   Should calculate for both scenarios before
    consolidating
Amount to be Consolidated
Term of Loans varies based on amount

•   Under $7,500          10   years
•   $7,500 - $10,000      12   years
•   $10,000 -20,000       15   years
•   $20,000 – 40,000      20   years
•   $40,000 – 60,000      25   years
•   Over $60,000          30   years
     Examples of Consolidation Costs
       Underlying Stafford Loans                   Consolidated Loans


• Amount                  $51,000            • Amount                   $51,000

•   Interest Rate          6.8%              •   Interest Rate          4.7%
•   Term                   10 yrs            •   Term                   25 yrs
•   Monthly                $587              •   Monthly                $289
•   Total Paid             $70,440           •   Total Paid             $86,700



    Much more affordable monthly payment at cost of $16,260 in additional interest
    - an increase of 23% in total payments
Falling Interest Rates and Consolidation


• New marketplace
  – Consolidation as a means of refinancing
  – Lock in low fixed rate for up to 30 years as
    opposed to keeping variable rate loans that
    may go up to 8.25%
  – Rise of Consolidation Loan companies
  – Raiding of Portfolios of “traditional” lenders
  – Calls for repealing single holder rule
  – Calls for permitting multiple consolidations
Falling Interest Rates and Consolidation



• Confusion and cold calls
  – Students besieged with marketing materials
    by mail, email and phone calls
  – Students and former students may not
    understand rules and procedures
  – They also miss out, frequently, on their own
    best interests
Falling Interest Rates and Consolidation

• Misleading information
  – Examples show how much lower the monthly
    payment can be
  – Rarely if ever show how much total payments
    will be over time with extended term
  – Call for better consumer information in
    Reauthorization
• Market Frenzy and Mass Consolidation
  – This past June, I hope, was high water mark
  – Phone calls, confused students, frenzy on
    June 30
June 2005

• Last four days of June
  –   93,691 incoming phone calls and faxes
  –   June 30 late night call
  –   Line out the door on June 30
  –   Staff diverted from other duties to handle

  – 10 PM Blank Fax Received
     • Did print fax number at top
     • Faxed him back, he re-sent and loan went through
• Will June 2006 be more of the same?
Who wins?
• Sometimes it is beneficial to consolidate
  – Loans from multiple sources/holders
  – Large debt means cannot make payments on
    regular ten-year term
  – Locking in a low interest rate is a good thing
    for the individual borrower IF it actually saves
    money and/or enhances cash flow to meet
    current needs
• Alumni generally are “winners” by
 consolidating in current environment (but
 not always)
Who loses?
• Federal Treasury – subsidy costs estimated at
  $14 Billion minimum to $48 Billion between
  2005-2011.
  – If interest rates approached late 1970s and early
    1980s, that would soar to $81 Billion
  – estimates were that Consolidation loans with variable
    rate would save the government $2.6 Billion by 2015
    (now that both underlying loans and Consolidation
    loans are fixed rate, similar savings should occur)
• Why – extended term of repayment at
  historically low fixed interest rates will cost
  taxpayer for next 30 years
Who loses, continued

• New and future students – money spent
  on former students, through budget
  scoring, reduces chances for increased Pell
  Grants, borrower loan limits and other
  Title IV aid
• Borrowers who consolidate and pay more
  over time even though monthly payment
  may be lower
Who loses, continued

• FFY 2005 – in FFEL alone

• Consolidation Volume         $54 Billion
• Stafford and PLUS Volume $43.3 Billion
• Expect that to reverse next year,
 according to the Administration’s recent
 budget proposal
Who loses, continued
• Maybe it will reverse somewhat
  – After June 30, no more in-school consolidation
  – After June 30, new loans are fixed at 6.8%
    AND older variable loans are likely, based on
    interest rates to date this year, to be reset at
    roughly that same level (still variable, but in
    2007 we should not see same frenzy since
    variable loans will likely have about same rate
    as fixed)
Questions?

				
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