MASFAP – Spring Conference 2006 CAUTION: Merging Loans Ahead – For Consolidation Info, Tune to AM 7562 Chris Simmerman, Sallie Mae Lake Ozark, MO Greg Diamond, MOHELA March 8-10, 2006

Welcome to the Loan Consolidation Session Agenda  Welcome & Introductions  Loan Consolidation Basics  Current Issues By the end of the session, you will:  Understand the regulatory aspects of the loan consolidation program  Know the current issues surrounding loan consolidation and how they will impact your institution

Loan Consolidation Basics

History  Congress enacted the Federal Consolidation Loan Program in 1986 with the intent of reducing default rates and costs. Since then, several legislative initiatives have dramatically altered the FFEL program and created the FDL program. Since 2000, huge drop in variable rates dramatically increases interest in Federal Loan Consolidation. Description  A Federal Consolidation loan allows borrowers to combine their eligible federal education loans into one new loan – and can extend the repayment term, allowing lower monthly payments. The interest rate is a fixed weighted average. What is Federal Loan Consolidation?

Consolidation Timeline *Note: ED has not yet issued guidance on newly enacted rule changes; information offered in this presentation is subject to change.

Eligibility Stafford Loans – Federal and Direct  Subsidized and unsubsidized Perkins Loans Most Health and Human Services Loans  HPSL  Nursing – NSL, including LDS  HEAL – not all lenders offer HEAL consolidation Consolidation Loans – Federal and Direct* Defaulted Student Loans** PLUS Loans – Federal and Direct  Cannot combine parent’s loans with student’s loans Private Loans  Cannot be consolidated in a federal consolidation loan * Subject to regulatory limitations for re-consolidation. **Must meet specific Federal and Lender requirements

When Can Borrowers Consolidate? * For underlying loans disbursed on or after July 1, 1995, consolidating during these statuses ensures lower interest rate ** May be eligible for grace period on consolidation loan ** FDLP FFELP ForbearanceRepaymentDeferred *In Grace *In School * ** FDLP FFELP ForbearanceRepaymentDeferred * Grace *In School * © 2005 Sallie Mae, Inc. All Rights Reserved Loan Status

Why Would A Borrower Consolidate? Some of the reasons Provides longer repayment period for higher debt levels  Lowers payments, extending the loan term Combines all loans into one for convenience Is easy to manage Can provide interest savings with the low current rates  More on this later…

Extending the Loan Term

How is the consolidation interest rate determined?  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 interest rates of underlying loans rounded up to the nearest 1/8 th percent  The interest rate is capped at 8.25% Note: Special rules apply to consolidation loans that include HEAL loans. Federal Consolidation Loan Program

Calculating the Interest Rate

Know When to Consolidate Picking the Best Time – Locking in a Fixed Rate  Loan Status Influences Fixed Rate  Current fixed consolidation rate for In-School, Grace, or Deferment is 4.75%  Current fixed consolidation rate for Repayment or Forbearance is 5.375%  Remember:  Consolidation Rate Formula = Weighted average rounded up to nearest 1/8%  Fixed interest rate locks in place when you consolidate

Consolidation Pros and Cons Pros  Monthly payment reduction up to 51% or more  Long-term payment relief – up to 30 years to repay  Convenience of making one monthly payment to one lender  Ability to lock in a fixed rate and protect against future rate increases  Flexible repayment plans  Attractive to those whose income fluctuates  Can be an effective default avoidance tool Cons  Fixed rate prevents borrowers from taking advantage of future rate decreases  Can increase total interest costs due to extended term  Deferment benefits may be reduced  Some interest subsidy benefits may be lost  Borrower benefits on underlying loans will no longer apply

When is consolidation necessary? Serious consideration must be given whenever borrowers are having trouble making payments To Consolidate or Not CAUTIONALERTWARNING If monthly payment amount approaches 8% of monthly income, borrower may want to consider loan consolidation If monthly payment amount approaches 10% of monthly income, borrower may need to consider loan consolidation If monthly payment amount approaches 15% of monthly income, borrower may have to consider loan consolidation

To Consolidate or Not What will it “cost”?

Interactive calculators help borrowers compare and consider different options. Many FFEL Lenders Offer Consolidation Calculators    Direct Loans Visit to view the different repayment options and example monthly payment amounts for a variety of consolidation scenarios. To Consolidate or Not

Single Holder Rule  Understand who’s an eligible lender and who is not Minimum balance  No Federal minimum, however most lenders set a minimum Choosing a lender  FFEL? Direct? Private? – Know the rules! Compare benefits  Cash back is not always better than a rate reduction. Know the total “value” of a benefit before deciding How long does it take?  Typically 4-8 weeks. Quicker if all loans are with one lender. Keep making payments! Your existing loan situation:  Other Items to Consider

Spousal consolidation  Know the Rules! General Advise – “Don’t Do It!” Deferment  Generally the same as Stafford Loans Forbearance  Generally the same as Stafford Loans Bankruptcy  Typically not dischargeable Loan forgiveness  Stafford forgiveness maybe, Perkins forgiveness rarely Disability and death discharge  Discharge options still carry over Perkins:  Grace period – 9-month vs. 6-month  Deferment – Lose subisdy with FFEL, Keep subsidy with Direct Special Considerations

Current Issues In Loan Consolidation

Current Issues – Early Repayment Early Repayment Option May 16, Department of Education issued guidance on FFEL consolidation while borrower is currently enrolled In short – YES, it is allowable under current rules Reference Dear Colleague Letter GEN NCHELP Questions and Answers document available at Attach.doc Attach.doc DL borrowers have always been allowed to consolidate while enrolled

Current Issues – Early Repayment Early Repayment Option Allows in-school FFEL borrowers to lock in today’s low interest rates Borrower is eligible to consolidate again if eligible loans are subsequently issued Consolidation does not jeopardize continued financial aid eligibility, assuming borrower has not reached aggregate loan limits

Current Issues – Early Repayment Early Repayment Process Overview Borrower submits request to forfeit grace period and move loans from in-school status to repayment status  Lenders are not required to honor early repayment requests Borrower status remains in-school, loan status changes from in-school to repayment  Lender may provide repayment documents for loans entering repayment status Borrower requests loans be placed into a school deferment* Deferred loans are now eligible for consolidation at the lower deferment rate applicable to newer Stafford loans * Some lenders may use enrollment information in their possession to automatically defer loans.

Current Issues – Early Repayment Early Repayment Process Overview (cont’d) Borrower applies for consolidation pre-July 1 st to lock in lowest rate possible Consolidation application is processed  Lender may provide repayment documents for new consolidation loan upon disbursement Borrower requests school deferment on new consolidation loan after disbursement* * Some lenders may use enrollment information in their possession to automatically defer loans.

Current Issues – Legislation HEA Reauthorization (S & H.R. 609) Both bills stalled after passage in 2005 by respective authorizing committees Many provisions were incorporated into the Deficit Reduction Act of 2005  Reauthorized loan programs through 2012, but did not provide full HEA reauthorization HEA extensions passed in 2005 expire March 31, 2006 HEA now awaiting further action, which could include:  Passage of another short-term extension  Passage of reauthorization legislation without any other changes  Passage of reauthorization legislation incorporating additional changes to the HEA (such as those not included in the Deficit Reduction Act)

Current Issues – Legislation Deficit Reduction Act of 2005 (PL ) Signed into law on February 8, 2006 General effective date of July 1, 2006 Among other provisions, makes several changes affecting the consolidation program  Eliminates “in-school” and “early repayment” consolidation  Limits consolidation of FFEL loans into DL  Limits re-consolidation of FFEL and DL consolidation loans  Eliminates spousal consolidation loans  Mandates parallel terms between FFEL and DL consolidation loans (except as explicitly noted)

Current Issues – Legislation Deficit Reduction Act of 2005 (continued) Consolidation provisions Eliminates in-school and early repayment consolidation  Eliminates option for student to request repayment to begin early on Stafford loans  Reiterates requirement that loans be in grace or repayment status to be eligible for FFEL consolidation  Add requirement that DL consolidation applicants meet same eligibility criteria as borrowers applying for FFEL consolidation FFEL borrower may consolidate in DL program under limited conditions  FFELP loan holder denies the application for consolidation and/or does not offer income sensitive repayment terms

Current Issues – Legislation Deficit Reduction Act of 2005 (continued) Consolidation provisions Eliminates reconsolidation in both FFELP and DL programs  Borrower’s eligibility to consolidate in either program terminates upon receipt of a consolidation loan through either program  Current exceptions continue to apply (e.g., if the borrower obtains subsequent loans or left loans out)  Adds new exception for situations where borrower’s consolidation loan has been submitted for default aversion assistance and borrower seeks DL consolidation for income-contingent repayment  Allows DL consolidation as a means of resolving default

Current Issues – Legislation Deficit Reduction Act of 2005 (continued) Consolidation provisions Raises the fixed rate that was scheduled to take effect July 1, 2006 for PLUS loans (originally was slated to be 7.9%, now will be 8.5%) Loans issued prior to July 1, 2006 retain their variable rate characteristics until they’re paid-in-full Does not alter the fixed interest rate that was scheduled to take effect July 1, 2006 for Stafford loans (will be 6.8%, regardless of loan status) Does not alter the consolidation interest rate formula Does not alter the “single holder rule”

Current Issues Interest rate change  This may be the most important issue for schools to factor into their loan consolidation strategy this year  When rates reset July 1 st, 2005 they may be significantly higher than they are today  Borrowers considering consolidation this spring, should be sure to submit their applications before the Stafford variable interest rate resets  But will the rate be higher?...

How has the T-bill rate changed this year? 3.00% 5/31/05 Source: U.S. Department of Treasury, Bureau of the Public Debt 4.63% 2/27/06

How have Rates Changed Over Time? interest rates are based on: 02/27/06 T-Bill Auction Source: U.S. Treasury Department, Bureau of the Public Debt; U.S. Department of Education

What if interest rates go up?

Questions ? ? ?

Thank you for attending ! ! ! Proactively addressing this important issue will serve your students well and prevent problems for your office Let us know how we can assist you