“You want to do what?” A Primer on Loan Consolidation Paul S. Garrard Vice President, NCHELP NYSFAAA, 24 October 2002

So, what is all the fuss about?  Interest rates absolutely tanked on July 1, 2002  Consolidation offers a fixed (as in never to change again) rate  Everybody and their brother has come out of the woodwork  No longer “should” I consolidate, more like “when” and “with who”

Before we get started  Don’t make this more complicated than it already is, but do your homework  Summary in Greentree Gazette July 2002  look for consistency of information  Information versus advice  Consolidation is really a repayment option

Before we get started (con’t.)  Incomplete information can be as dangerous as inaccurate information  Consolidation does not have to mean extended repayment

What we plan to cover  Some basics (in the primer)  What is loan consolidation?  Why do borrowers consolidate?  What kind of programs are available?  How do you consolidate?  When should I consolidate?  Can I reconsolidate?  Some detail (in the primer)  Some questions you might want to ask  Reauthorization and loan consolidation

Some detail (questions to ask)  Which loans?  Interest rate?  Grace, deferment and forbearance?  Interest subsidy?  Borrower benefits?  Repayment options?  Monthly and total repayment amounts?  How are payments applied?  Who is the servicer?  Fees or other costs?  How long will it take?  What about spousal consolidation?

Some things to consider as we move towards Reauthorization  How does loan consolidation influence how you counsel your borrowers, and does it adversely impact your credibility?  How will loan consolidation impact lenders’ pricing strategies for Stafford Loans?  Should taxpayers subsidize consolidation loans?  What about consumer protection for our borrowers?

What we plan to cover  Some basics  What is loan consolidation?  Why do borrowers consolidate?  What kind of programs are available?  How do you consolidate?  When should I consolidate?  Can I reconsolidate?

What is loan consolidation?  Paying off multiple loans with one new loan  Now a refinancing tool  Different than “serialization” or the “combining” of loans

What we plan to cover  Some basics  What is loan consolidation?  Why do borrowers consolidate?  What kind of programs are available?  How do you consolidate?  When should I consolidate?  Can I reconsolidate?

Why do borrowers consolidate?  For convenience  To save money  In some cases, to extend deferment

First, for convenience  The issue is multiple loan servicers, not really multiple loans  Some servicers offer “combined billing”

Second, to save money  a) reduce monthly payments (at the expense of higher total repayment) or b) reduce both monthly payments and total repayment  FFELP borrowers prior to October 7, 1998 must consolidate in order to access extended repayment (those on or after that date must have a balance of $30K or more)  Direct Staffords already eligible for extended repayment without consolidation

Third, to extend deferment  Some borrowers may be able to access additional deferments or renew deferments  See the primer in the section Some Detail

What we plan to cover  Some basics  What is loan consolidation?  Why do borrowers consolidate?  What kind of programs are available?  How do you consolidate?  When should I consolidate?  Can I reconsolidate?

What kind of programs are available?  Federal Consolidation (FFELP)  Direct Loan Consolidation (FDSLP)  HEAL Refinancing

FFELP versus FDSLP  Federal Consolidation (FFELP) is offered through banks, traditional lenders, etc., and lenders offering Federal Consolidation compete against each other  Direct Loan Consolidation is offered by the federal government and competes with Federal Consolidation  These are both really federal programs, which adds to the confusion

Who’s eligible for Federal Consolidation (FFELP)?  Available to all Stafford borrowers, including Direct Loan borrowers  Just a tad bit of confusion about the “Single Holder Rule”

“Single Holder Rule”  FFELP borrowers with one loan holder must first contact that holder about consolidation and may only “shop” if their holder either a) does not offer consolidation or b) does not offer Federal Consolidation with ISR  This is buried in the promissory note  FFELP borrowers with at least two holders can “shop till they drop” (two holders does not mean Perkins)  Will eliminating the SHR increase solicitations?  How would that impact your job?

Direct Loan Consolidation  In general, available to borrowers with at least one Direct Loan  Available to FFELP borrowers out of school whose holder either a) does not offer Federal Consolidation or b) does not offer Federal Consolidation with Income Sensitive Repayment terms the borrower finds acceptable  Please don’t ask me what “acceptable” means

What we plan to cover  Some basics  What is loan consolidation?  Why do borrowers consolidate?  What kind of programs are available?  How do you consolidate?  When should I consolidate?  Can I reconsolidate?

How do I consolidate?  Contact your loan holder (or servicer)  Many borrowers now apply on the Web  Speak with your financial aid officer

What we plan to cover  Some basics  What is loan consolidation?  Why do borrowers consolidate?  What kind of programs are available?  How do you consolidate?  When should I consolidate?  Can I reconsolidate?

So, when should borrowers consolidate?

 Interest rates usually lower during school, grace, and deferment  Rates on variable rate Staffords change July 1, usually announced late May or first week of June following the T-Bill auction  Watch solicitations that push consolidation during grace if the borrower(s) you counsel may qualify for deferment

So, when should borrowers consolidate (continued)?  In general, borrowers will get a lower rate if they consolidate during school, grace, or deferment  Just remember, borrowers are hedging their bets that the fixed rate they get will be lower than the average rate they would get over the course of repayment

What’s the deal with in-school consolidation?  Be sure you know how the term “in-school” is being used  Is the “in-school” reference to the borrower or the loan?  In the lending community, repayment is defined as the day after the grace period expires  Seem to be exceptions to everything

Federal Consolidation (FFELP) while currently enrolled  In general, no, but …  You can consolidate loans that have entered repayment (previous loans whose grace period has expired, with the borrower back in an “in-school” deferment)  You cannot consolidate loans you are currently receiving  Talk with your loan servicer about this

Direct Loan Consolidation while currently enrolled  In general, yes, if they are eligible for DLC  You must be attending a DL school and include one DL or FFELP in an “in-school” period (fully disbursed), OR  You are attending a non DL school and you have at least one DL and you include at least one DL or FFELP in an “in-school” period (fully disbursed)  What about FFELP only borrowers attending a non DL school?

DLC while currently enrolled in school (con’t.)  FFELP only borrower attending a non DL school may consolidate with DLC, but may only include FFELP loans that have entered repayment, not any loans they are currently receiving

What we plan to cover  Some basics  What is loan consolidation?  Why do borrowers consolidate?  What kind of programs are available?  How do you consolidate?  When should I consolidate?  Can I reconsolidate?

Can I reconsolidate?  You cannot reconsolidate or “refinance” one Federal Consolidation Loan  You can reconsolidate one DLC, but not sure why you would (80 basis point discount no longer applies and deferments can only be renewed once)  In general, you can add loans up to 180 days to your original consolidation loan

Can I reconsolidate? (con’t.)  “I’ll just keep one or two loans out, and consolidate them later with my original consolidation loan in order to take advantage of any interest rate drop”  Nice try, but remember that the original consolidation loan already has a fixed rate

Question #1 – Which loans can be consolidated?  GSL, SLS, Stafford, PLUS  Perkins  HPSL, LDS, Nursing Student Loans  Federal and Direct Consolidation Loans  HEAL  You cannot consolidate private loans with either Federal or Direct Loan Consolidation  You cannot consolidate Primary Care Loans

Question #2 – How is the interest rate calculated?  Weighted average of all underlying loans rounded to nearest one eighth of one percent, then fixed throughout repayment  Fixed rate cannot exceed 8.25%  Same initial rate for FFELP and FDSLP (no more 80 basis points discount for DL)  Older loans may have higher rates  Discounts usually have conditions

Current interest rates  3.46% for Staffords disbursed on or after July 1, 1998 if borrower is in school, grace, or deferment  4.26% for Staffords disbursed on or after July 1, 1995 but prior to July 1, 1998 if borrower is in school, grace, or deferment  Rates are 60 basis points (.6%) higher during forbearance and “active” repayment

Question #3 – What about grace, deferment, forbearance?  Let’s just forget this question and move to the next question.

Grace, deferment, forbearance with Federal Consolidation  Lose remaining months of grace  “Old” borrowers (pre July 1, 1993) who consolidate all Staffords at the same time move to “new” status, may apply for EHD  No internship residency deferment  “New” borrowers do not lose remaining EHD eligibility (and should ask about renewal)  Graduate fellowship deferment available  Forbearance still available

Grace, deferment, forbearance with Direct Loan Consolidation  Consolidate while enrolled in school and keep your grace, do it out of school and lose your grace  In general, deferments are renewed and new deferments (EHD) available  Get both pre and post July 1, 1993 deferments if you include at least one pre July 1, 1993 loan  Graduate fellowship deferment available  Forbearance still available

Question #4 – Do you keep the subsidy during deferment?  yes on Sub Staffords  no on Perkins with Federal Consolidation  yes on Perkins with Direct Loan Consolidation  no on HPSL and LDS in both Federal and Direct Loan Consolidation

Question #5 – What about repayment benefits?  In general, you lose them because they were attached the loan, and now the loan no longer exists  Some lenders offer them on consolidation loans, just know the conditions (and the grace period for late payments)  Remember what may happen to up front pricing if consolidation remains all the rage

Question #6 – What are the repayment options?  In general, all repayment options should be available, including:  Standard (Level)  Graduated  Income Based (ISR or ICR)  Extended Repayment

Question #7 – What are both the monthly and total amounts?  Ask your consolidating lender  Use repayment calculators on the Web  Use software if your loan program provides it

Question #8 – Can I pay early, how are payments applied?  No penalty for early repayment  In general, payments on federal loans are applied first to any collection costs, second to any accrued and capitalized interest, and third to any remaining principal  Check with the servicer of the consolidation loan about this

Question #9 – Who will service my consolidation loan?  Ask your consolidating lender  Financial aid officers, time to shine  What kind of comfort level do you have with this servicer?

Question #10 – What about fees?  What about them, there should be none  Often referenced in marketing materials

Question #11 – How long will this take?  You may hear 45 to 60 days, depending on how many lenders are involved  Web should help speed things up  Keep status on loans current during consolidation process  Be sure you know what rate will be used on loans you are consolidating when the new fixed rate is determined

Question #12 – What about spousal consolidation?  NBC miniseries just waiting to happen  Both parties become jointly and severally liable  Spouse must repay if partner dies  Can adversely impact deferment options  Some consolidating lenders do not offer spousal or joint consolidation

Some things to consider as we move towards Reauthorization  How does loan consolidation influence how you counsel your borrowers, and does it adversely impact your credibility?  How will loan consolidation impact lenders’ pricing strategies for Stafford Loans?  Should taxpayers subsidize consolidation loans?  What about consumer protection for our borrowers?

Thanks, and best wishes from your friends at NCHELP! ____