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Student Loans Consolidation

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					Presented by: Kathleen Smith
Education Finance Council February 13, 2007

EDUCATION FINANCE COUNCIL MAKING COLLEGE MORE AFFORDABLE

Consolidation Issues “How Can I Miss You If You Won’t Go Away?”

Overview
 Consolidation changes under HERA  Political considerations
– Cost – Who benefits?

 New (and not so new) proposals
– Reinstate in-school consolidation – Reconsolidation – Impact of ICR

 New considerations
– Consolidation marketing – Consolidating private loans – Interest rate proposals

 What it all means
EDUCATION FINANCE COUNCIL MAKING COLLEGE MORE AFFORDABLE

Consolidation Changes Under HERA
 Ends two-step and super two-step: borrowers can consolidate only once
– Borrower’s eligibility for a consolidation loan terminates upon receipt of a consolidation loan either FFELP or DL except a FFELP consolidation borrower may receive a consolidation loan under DL only for the purposes of ICR and only if the loan has been submitted to the guarantor for default aversion

 To consolidate from FFELP to DL, borrower must first be denied consolidation or income sensitive repayment
– This change was repealed in emergency supplemental spending bill passed in June 2006 (never actually took effect) – Emergency supplemental also repealed Single Holder Rule

EDUCATION FINANCE COUNCIL MAKING COLLEGE MORE AFFORDABLE

Consolidation Changes Under HERA
 Spousal consolidation is repealed  In-school consolidation is repealed
– Amends “early repayment” section that provided for in-school consolidation by stating that for requests received by FFELP lenders on or after July 1, 2006, repayment begins the day after six months after the date the student ceases to be enrolled at least half time

 Requires DL to conform to all FFELP consolidation eligibility requirements
EDUCATION FINANCE COUNCIL MAKING COLLEGE MORE AFFORDABLE

Consolidation Changes Under HERA

Why did they do what they did?

 Closing “loopholes” – ensuring the program is used as it was intended
– NOT created as a tool to secure a particular interest rate – NOT created as a tool to jump back and forth between different lenders and different loan programs – IS supposed to assist borrowers with multiple loans and multiple lenders to combine loans to have a single monthly payment – IS supposed to allow borrowers with high debt levels to extend repayment term as needed
EDUCATION FINANCE COUNCIL MAKING COLLEGE MORE AFFORDABLE

Political Considerations
Cost
– Before July 1, 2006, there was a mismatch between variable rate underlying loans and fixed rate consolidation loans – In times of declining interest rates (20012004) fixed rate consolidation is extremely costly to the federal government – Program structure allowed short-term interest rates (3 month T-bill) to be converted to long-term debt (up to 30 years)
EDUCATION FINANCE COUNCIL MAKING COLLEGE MORE AFFORDABLE

Political Considerations
 Who benefits?
– Consolidation, by definition, is a tool for borrowers in repayment … in other words, college graduates – In a time of scarce resources, some lawmakers thought that costly consolidation benefits could take away from front-end benefits to students – With historically low interest rates, consolidation volume spiked. These borrowers were locking in an interest rate … not using consolidation as originally intended, to achieve a single monthly payment and longer repayment term as needed
EDUCATION FINANCE COUNCIL MAKING COLLEGE MORE AFFORDABLE

Political Considerations
 Consolidation loans became a highly contentious issue in 2003 and 2004
– Proposals for variable rate consolidation, fixed/variable option – Proposals for consolidation origination fee

 Consolidation (almost) became a non-issue in 2005 when it became clear that fixed 6.8 percent Stafford rate would take effect
– Consolidation formula didn’t change (weighted average of the underlying loans, rounded up to nearest 1/8%) but no longer matters when underlying loans are fixed.
• Stafford repayment rate = 6.8% • Consolidation repayment rate = 6.875%

EDUCATION FINANCE COUNCIL MAKING COLLEGE MORE AFFORDABLE

New (and not so new) Proposals
 Reinstate in-school consolidation
– Anecdotal reports from FAAs that students are misrepresenting enrollment status – there is a demand for in-school consolidation – With fixed rate Stafford loans, why is it needed?

 Permit “reconsolidation”
– Would assist borrowers who consolidated variable rate loans when interest rates were much higher (closer to 8.25% cap) – Would be extremely costly to federal government
EDUCATION FINANCE COUNCIL MAKING COLLEGE MORE AFFORDABLE

New (and not so new) Proposals
 Impact of ICR and similar concepts
– Proposals to limit repayment to certain percentage of income (legislatively and via neg reg) – Proposals to forgive loans after 25 years of repayment – Proposals to forgive loans for public sector employees after 10 years of repayment – If repayment terms and options are changed, will it reduce the need for – and demand for – consolidation?
EDUCATION FINANCE COUNCIL MAKING COLLEGE MORE AFFORDABLE

New Considerations
Consolidation marketing
– The boom in consolidation created a new segment in the marketplace – Consolidation “brokers” appeared, pushing students to consolidate and selling the applications (do borrowers get benefits that were promised?)

EDUCATION FINANCE COUNCIL MAKING COLLEGE MORE AFFORDABLE

New Considerations
 Consolidating private loans
– Lack of borrower knowledge: if borrowers don’t know the difference between federal and private loans in the first place, they also don’t know that traditional consolidation is not available on private loans – Lenders are creating new products and services to deal with the rise in private loan borrowing – Issues surrounding private loan consolidation are very different than those surrounding consolidation of federal loans
EDUCATION FINANCE COUNCIL MAKING COLLEGE MORE AFFORDABLE

New Considerations
 Interest rate proposals
– Congress is considering incrementally phasing down interest rates – could result in borrowers with a different interest rate for each loan borrowed – Will this push borrowers into consolidation? – How will loans be serviced? How will payments be applied? (Can borrowers request that payment apply to loan with highest interest rate first?) – What will this mean for exit interview?
EDUCATION FINANCE COUNCIL MAKING COLLEGE MORE AFFORDABLE

What It All Means
 Consolidation was created for a specific purpose – to allow borrowers with multiple loans and multiple lenders to obtain a single monthly payment and extend the repayment term as needed
– Consolidation is still an option for borrowers, and will still fulfill those needs

 Why has consolidation gotten so much attention?
– When interest rates were at historically low levels, the debate was distorted and the program was misunderstood – With rising debt levels, policymakers will increasingly focus on repayment issues

EDUCATION FINANCE COUNCIL MAKING COLLEGE MORE AFFORDABLE

Questions & Discussion
Consolidation Issues “How Can I Miss You If You Won’t Go Away?”

EDUCATION FINANCE COUNCIL MAKING COLLEGE MORE AFFORDABLE


				
DOCUMENT INFO
Description: The following presentation is information regarding college loan consolidation, and student loans.