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					The Changing Tide of Loan
      Consolidation




       Doug Kovell – Manager, Campus Programs
                                 Sallie Mae, Inc.
               The Changing Tide of Loan
                     Consolidation

Agenda
• Consolidation Basics
• Consolidation Changes and
  Considerations
• Quiz
• Q&A



   2006 Sallie Mae, Inc. All rights reserved.
        Learning Objectives
• By the end of the session, you will:
• Know what federal student loan consolidation is
  and how to determine if it is a good option

• Understand recent consolidation changes and
  resulting considerations

• Be able to counsel borrowers regarding the best
  time and best loans to consolidate
Consolidation Basics
 What Is Loan Consolidation?
• A Federal Consolidation loan allows the
  borrower to combine one or more of their eligible
  federal education loans into one new loan – and
  can extend the repayment term, allowing lower
  monthly payments.

• Loan consolidation is a financial management
  strategy that can benefit both student and parent
  borrowers, although it may not be the best
  strategy for every borrower.
 What Is Loan Consolidation?
• Lender issues new loan and pays off the loan(s) put into
  the consolidation
   – Terms associated with individual loans no longer apply
• Consolidation loan has its own interest rate and different
  payback terms
• Consolidation loans may offer specific, unique borrower
  benefits
   – Benefits applicable to loans included in the consolidation are
     typically forfeited
• Consolidation loans usually cannot be refinanced
   – Borrowers can reconsolidate under specific conditions
     Federal Consolidation Eligibility
       Eligible Loans*                                              Ineligible Loans


     Subsidized Stafford
     Unsubsidized Stafford
                                                                  Institutional loans


     Direct Subsidized Stafford
     Direct Unsubsidized Stafford
                                                                  Private loans from banks
                                                                   and credit unions
    PLUS loans


     Perkins Loan
     Many federal health professions
                                                                  Credit cards
     loans
    FFELP Consolidation **                                       Car loans
    Direct Consolidation **
* See Common Consolidation Application / Promissory Note for a
                                                                  Personal loans from friends
      complete listing of all eligible loans                       and family
**   Special rules apply to re-consolidation of existing
     consolidation loans
Consolidation Payment Plans
• Repayment plans, same as Stafford
  –   Standard
  –   Extended
  –   Graduated
  –   Income-sensitive/income-contingent
• Can switch plans annually if needed
  – Some lenders may allow more frequent changes if
    necessitated by borrower’s circumstances
  – Changes to repayment plans must still ensure loan is
    repaid within maximum repayment term
 What Is Loan Consolidation?
• Borrowers should be wary of:
   – Consolidation loans that include origination fees, prepayment
     penalties, credit checks or variable interest rates
       • Loans with these types of terms are likely not federal consolidation
         loans
   – Consolidating certain non-Stafford loans, e.g., Perkins loans,
     with interest subsidy benefits that will be lost upon consolidation
       • Borrowers may exclude these loans from consolidation until they no
         longer anticipate using subsidy benefits (e.g., grace and/or
         deferment periods)
       • Borrowers may include these loans in a subsequent consolidation
         loan at a later date
     Consolidation

Changes & Considerations
       Consolidation Changes
• Effective July 2006, the following changes directly affected Federal
  Student Loan Consolidation:
    – Elimination of in-school consolidation in DL and early repayment
      consolidation in FFEL
        • Consolidation permitted only when loans are in a grace or repayment status,
          including deferment or forbearance
    – Elimination of spousal consolidation
    – Termination of consolidation eligibility upon receipt of a consolidation
      loan in either the FFEL or DL program, unless borrower meets certain
      specific conditions
    – Mandates parallel terms between FFEL and DL consolidation loans
      (except as explicitly noted)
    – Elimination of Single Holder rule
        • (effective June 15, 2006)
    Consolidation Changes
• Effective July 2006, the following change
  indirectly affected Federal Student Loan
  Consolidation:
  – Fixed interest rates for Stafford and PLUS loans
     • Stafford loans have a fixed rate of 6.8%
     • FFEL PLUS loans, including Grad PLUS, have a fixed rate of
       8.5%
        – Consolidation interest rate cap of 8.25% may be advantageous
          for PLUS borrowers
      What did NOT Change
• Consolidation interest rate
  – Consolidation loans have a fixed interest rate for the
    life of the loan
  – To determine the fixed rate, a weighted-average is
    computed based on current interest rates of
    underlying loans
     • Calculated rate is rounded up to the nearest 1/8th percent
  – The interest rate is capped at 8.25%
  – Special rules apply to the portion of a FFEL
    consolidation loan comprised of HEAL loans
Loan Portfolio Considerations
• 2006 / 2007 Borrower Loan Portfolio
  – May contain any or all of the following:
     •   Consolidation loan with a fixed rate
     •   Perkins Loan with a fixed rate
     •   Stafford loan with variable rate
     •   Stafford loan with a fixed rate
     •   PLUS loan with variable rate
     •   PLUS loan with a fixed rate
           – Includes Grad PLUS
     • Private loan with variable rate
                 Grad PLUS
• Same program as the PLUS loan, but available
  to graduate and professional students
• Fixed interest rate of 8.5%
  – Consolidation interest rate cap of 8.25%
• Consolidation available after full disbursement
  of loan
• Deferment available while student is enrolled
  in school
     Timing Considerations
• Timing
  – June 30th may no longer be a critical deadline
     • For borrowers with fixed rate loans
     • For borrowers who already consolidated
  – June 30th, 2007, is important for those graduating
    who still have variable rate Stafford loans
     • Can consider locking in at today’s rate or allowing the loans
       to remain variable
     • Wait to see the new 2007-08 Stafford variable rate published
       in early June
Grace Period Considerations
• Grace Period
  – 2007 graduates may have grace period
    considerations
     • Those who consolidated through early repayment
       consolidation forfeited their grace period on consolidated
       loans
         – Repayment begins immediately after separation
     • Those who borrowed in AY 2006-2007 may have at least one
       Stafford loan with a grace period
  – Borrowers need to be aware of their loan portfolio and
    be prepared to manage loans entering or re-entering
    repayment at different times
    Benefits Considerations
• Borrower Benefits
  – Borrowers who previously consolidated typically
    forfeited any underlying Stafford benefits
     • New consolidation benefits may apply
  – 2007 graduates with Stafford loans
     • Need to determine the “cash value” of the benefits on those
       loans before deciding to consolidate
     • Evaluate whether to earn a benefit, such as a principal credit
       / rebate, before consolidating
         – Have the lender define the “cash value” of the benefit
           being offered
Debt Management Considerations

• The decision to consolidate is no longer solely
  interest rate driven. Focus shifts to Debt
  Management
  – In a fixed rate environment borrowers need to
    consider:
     •   Timing and benefits
     •   Longer repayment terms
     •   Smaller monthly payments
     •   Assistance with loan portfolio management
Debt Management Considerations
• Repayment Terms
   – Choose a repayment timeline to meet financial goals
   – Choose a repayment timeline for today and tomorrow
• Interest Rates
   – Rate is based on the interest rates of the underlying loans being
     consolidated
• Repayment Amounts
   – Evaluate:
       • Borrower benefits
       • Current and future salary expectations
       • Value of a monthly budget
• Total Repayment Costs
Debt Management Considerations
        Consolidation Repayment Terms
                                  Maximum repayment
    If education debt total is:         term is:

         Less than $7,500              10 years

         $7,500 to $9,999              12 years

        $10,000 to $19,999             15 years

        $20,000 to $39,999             20 years

        $40,000 to $59,999             25 years

         $60,000 or More               30 years
Weighted Average Interest Rate
                              What is Weighted Average?


    $18,750                                      $18,750    x 3.875% =        $727

       C                                          $10,000 x      8.5% =       $850
       O
       N                                            $9,000 X     6.8% =       $612
       S       $10,000
       O                   9,000                   $3,000 x         5% =       $150
       L                     S                 -----------------------------------------------------------
       I                     T                   $40,750                     $2,339
       D        GRAD         A                 -----------------------------------------------------------
       A        PLUS         F                     $2,339 ÷ $40,750 = 0.05739
       T                     F
       I                     O      $3,000                              or    5.74%
       O                     R                 -----------------------------------------------------------
       N                     D      PERKINS          5.74% rounded up to the
                                                     nearest 1/8 % = 5.75%
    3.875%      8.5%       6.8%       5%


   Note: Special rules apply to consolidation loans that include HEAL loans
Debt Management Considerations
• Debt Management Strategy: Affordable Monthly
  Payments
  – Consolidation loans do not have prepayment
    penalties
  – Monthly payment amount is scheduled and easier to
    budget
     • No interest rate fluctuations to affect the monthly payment
       amount
     • Payment schedule is set for life of repayment (except
       income-sensitive / income-contingent schedules, or in cases
       where deferment or forbearance periods are used)
Debt Management Considerations
• Debt Management Strategy: Affordable Monthly Payments
   – Borrowers can take advantage of making larger monthly payments to
     reduce total interest costs
       • By voluntarily making increased payments
            – Retains the flexibility to make only the minimum required payment when finances
              dictate
       • By adjusting the repayment terms (consult with lender regarding availability
         of this option) to increase the scheduled payment amount
            – Establishing a shorter repayment schedule assures pay off in a set amount of time
   – Use of consolidation as “satisfactory repayment arrangement” for
     student who inadvertently exceeded annual or aggregate Title IV loan
     limit.
       • Common Manual – July 2006. Section 6.11.E, page 237
                Should You Consolidate?
Comparing loan costs pre-and post-consolidation

                             Before Consolidation                                                Consolidation
                                    7.14% *                                                         6.625%**
                             Standard repayment plan                                          Standard repayment plan
  Initial
Repayment                                                          Total                                                           Total
 Balance               Payback              Monthly              Repayment                Payback             Monthly            Repayment
                        Period              Payment               Amount                   Period             Payment             Amount
                                               $146                $17,525               15 years               $107               $19,292
  $12,500
                     10 years
  $20,000                                      $234                $28,040               20 years               $146               $35,085
                     10 years
                                               $461                $56,079               25 years               $264               $79,160
  $40,000
                     10 years

  $60,000                                      $701                $84,119               30 years               $370              $132,995
                     10 years
* Calculations assume a repayment interest rate of 7.14% based on 06/07 variable interest rate and do not take into account future interest rates.
** Calculated consolidation interest rate assumes consolidation loan comprised solely Stafford loans first disbursed between 7/1/98 and 6/30/06
(inclusive), consolidated during the Stafford grace period.
              Should You Consolidate?
Comparing loan costs pre-and post-consolidation
                                  10 Year Repayment Period
                            Before Consolidation                                              Consolidation
                                   7.14% *                                                       6.625%**
                            Standard repayment plan                                        Standard repayment plan
  Initial
Repayment                                                        Total                                                         Total
 Balance              Payback             Monthly              Repayment               Payback            Monthly            Repayment
                       Period             Payment               Amount                  Period            Payment             Amount

  $12,500                                    $146                $17,525              10 years               $143              $17,128
                      10 years

  $20,000                                    $234                $28,040              10 years               $228              $27,405
                      10 years
                                             $461                $56,079              10 years               $457              $54,809
  $40,000             10 years
  $60,000             10 years               $701                $84,119              10 years               $685              $82,213
* Calculations assume a repayment interest rate of 7.14% based on 06/07 variable interest rate and do not take into account future interest
rates.
** Calculated consolidation interest rate assumes consolidation loan comprised solely Stafford loans first disbursed between 7/1/98 and 6/30/06
(inclusive), consolidated during the Stafford grace period.
 Private Loan Considerations
• Private Loan Repayment
  – Managing variable rate private loans
      • Payment amounts can change monthly, quarterly, or annually,
        depending on the loan terms
          – Harder to forecast
          – Requires careful budgeting

              $15,000 at 8.25%           $146 per month
              $15,000 at 9.25%           $154 per month
              $15,000 at 10.25%          $163 per month

  – Fixed rate Federal consolidation loan with lower monthly payments
    can offer more funds to allow borrowers to focus on repaying their
    higher, variable rate private loans
  – Private consolidation loans are another option for borrowers who need
    more time to repay and want smaller monthly payment
      • Borrowers should closely examine private consolidation terms
      Portfolio Management
• Tools for portfolio management
  – Loan consolidation calculator
     • www.smartloan.com
        – Tools and resources
  – Credit Resources
     • Credit rating – www.myfico.com/CreditEducation
                        www.annualcreditreport.com
     • Identity theft –       www.consumer.gov/idtheft/

  – Consolidation loans may help to improve a borrower’s
    overall credit score since the monthly student loan
    payment and, consequently, the borrower’s debt-to-
    income ratio, will likely be lower
   Portfolio Considerations
• Repayment strategies are borrower
  specific
  – Tailored to meet the borrower’s financial goals
    •   Pay student loan debt quickly
    •   Pay higher rate debt first
    •   Save to buy a house, start a family
    •   Relocate, go into business, start a practice
Consolidation Considerations
• Federal Loan Consolidation is no longer a
  “one size fits all” solution
  – When is consolidation a good consideration?
     • When lower monthly payments allow borrower to
       focus on repaying higher interest rate debts
     • When long term payment relief is necessary
     • When interest rates are low and can be locked in
     • When solid borrower benefits make a difference
     • When loan forgiveness is not an option
Consolidation Considerations
• As the marketing to your borrowers intensifies,
  many will seek your guidance
  – Borrowers should consider:
     • Repayment can be a long-term relationship
     • Many, if not most, borrowers cannot reconsolidate under
       current rules
     • Many consolidation marketers are not the lenders
     • Ask who the lender/loan holder and loan servicer will actually
       be and whether this can change
     • Borrower benefits that may look too good to be true and
       require reading the fine print
Consolidation Considerations
• Know The Facts About Consolidation… AND
  share them with your staff and students:
       – Emails
       – Entrance & Exit Counseling
       – Letters
       – Consolidation Seminars for students

• Proactively addressing this important issue will
  serve your students well and prevent problems
  for your office!
QUESTIONS
Consolidation Quiz
                Quiz Question 1
Ann consolidated all her loans in 2005 and has no new loans. She is
unhappy with her lender and has found a better deal on the internet.
When she calls her lender, they advise she is not eligible to
consolidate again.

                           True
A borrower who has consolidated and has no new loans, or loans that
were previously left out, cannot reconsolidate. Consolidation eligibility
terminates upon receipt of either a FFEL or DL consolidation loan;
certain exceptions apply.
            Quiz Question 2
Michelle won the lottery! She is going to pay off the
entire $30,000 balance of her FFEL consolidation loan
in one lump sum. Michelle will also need to send in an
additional $300 (1%) as a penalty for prepayment.

                    False
The borrower may prepay the whole or any part of a
loan at any time without penalty.
               Quiz Question 3
•Through Federal consolidation, subsidized Stafford loans included
in the consolidation will retain their subsidy.


                         True
Many federal student loan advantages are retained in a
consolidation loan, including:
            •Forbearance
            •Deferment
            •Interest subsidy (subsidized portion)
            •Loan forgiveness (portion of consolidation loan
            comprised of Stafford loans)
               Quiz Question 4
•Scott consolidated his loans from his undergraduate program. He
then obtained more loans to complete a masters program. Scott will
be able to obtain a new consolidation loan to combine his old
consolidation loan with his new loans.



                         True
A borrower who currently has a Federal Consolidation loan can
consolidate again if he has obtained a new eligible loan after the
date the existing Consolidation loan was made, or is including a loan
that was originally not included in the consolidation.
                Quiz Question 5
•Mary is a junior in college. She has accumulated $17,500 in
Stafford loans that are currently in an in-school status. If Mary would
like to, she has the option to consolidate her student loans while she
is enrolled in school.

                         False
 The Higher Education Reconciliation Act eliminated a borrower's
 option of requesting to enter repayment early. To qualify for
 consolidation, an eligible loan must be:
          • In a grace period preceding repayment, OR
          • In repayment, including deferment and forbearance
              Quiz Question 6
• Borrowers who did not consolidate prior to July 1, 2006,
  now have a fixed rate of 6.8% on all of their Stafford
  loans.

                     False

• The change to a fixed 6.8% interest rates applies to new
  Stafford loans first disbursed on or after July 1, 2006.
                Quiz Question 7
•Nicole is a senior who calls your office because she is still being
besieged by consolidation marketing material. It is okay to tell Nicole to
toss the material and inform her she is required to consolidate with her
single holder lender.


                            False
P.L. 109-234, enacted June 15, 2006, officially known as the
“Emergency Supplemental Appropriations Act for Defense, the Global
War on Terror, and Hurricane Recovery”, eliminated the single holder
rule. Borrower can select any eligible lender for loan consolidation,
regardless of current loan holder.
              Quiz Question 8
•Heather attended school in 2004 and 2005. She received $5,000
in federal student loans each year. Heather is going to consolidate
her loans in May of 2007. In order to determine Heather’s weighted
average interest rate for her consolidation loan, you must know
what the interest rates were for student loans in 2004 and 2005.

                         False

 To determine the fixed rate, a weighted-average is computed
 based on current interest rates of underlying loans
                 Quiz Question 9
•Anita is graduating and is worried about finding a job. She
consolidated all of her eligible loans (through early repayment
consolidation) while she was enrolled last spring and also has a new
Stafford loan. Anita is entitled to a 6-month grace period only on her
new Stafford loan.

                          True
Consolidation loans do not have grace periods. A Federal
Consolidation loan enters repayment on the date the loan is disbursed
and goes into repayment immediately following a deferment.
            Quiz Question 10
•Helping borrowers successfully repay their
student loans is important to your office.

                    True

Successful student loan repayment is a win-win! Borrowers
benefit by maintaining good credit while your institution
maintains an excellent cohort default rate and can benefit
from generous alumni!

				
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