Download - Student Financial Assistance. Session 2 -2 Consolidation - What Is It And How Does It Work?
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Student Financial Assistance
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Session 2 - 2
Consolidation -
What Is It And How Does It Work?
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Session 2 - 3
Today’s agenda
I. Consolidation - the basics
II. Direct/FFEL - specifics
III. Past, Present, Future
V. Questions and Answers
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Session 2 - 4
Consolidation in a nutshell
A tool to help borrowers manage their student loan debt successfully.
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Session 2 - 5
Meeting today’s need
$0$5,000,000,000
$10,000,000,000$15,000,000,000$20,000,000,000$25,000,000,000$30,000,000,000$35,000,000,000$40,000,000,000$45,000,000,000
Total FFEL/DirectLoan Volume
TotalConsolidation
Volume
FFELConsolidation
Volume
DL ConsolidationVolume
1995
2002
Total Annual Dollar Volume
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Session 2 - 6
Meeting today’s need
FFEL and Direct Loan Trends
1995 - 2002 Average loan size
Increased $400 from 1995 to 2002Greatest growth in Unsubsidized and PLUS loans Subsidized Loan growth remains constant
Average number of loans borrowed per yearConsistent - 1.2 loans per borrower annually
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Session 2 - 7
Meeting today’s need
Typical Consolidation Borrower
Average age 34
Average debt $21,871
Average # of loans 4
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Session 2 - 8
When is consolidation a good choice?
Multiple loan holders Large debt Trouble making payments Defaulted or delinquent Regain Title IV eligibility if
in default
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Session 2 - 9
Other options to consider
Consolidation is not for everyone
Rehabilitation Partial consolidation Deferment/Forbearance
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Session 2 - 10
One lender/one monthly paymentFixed weighted average interest rate
Grace period interest rate savings Capped at 8.25% (PLUS at 9%)
No origination feesFlexible repayment optionsSecond chance for defaulted borrowersNo minimum or maximum amount
Consolidation Benefits
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Session 2 - 11
Fixed Weighted Average Interest Rate Advantage
Repayment Plan
Term (in months)
Monthly Payment - variable rate Assuming 8% avg. rate
Monthly payment - fixed rate 4% fixed weighted avg.
Saving over term of loan
Standard
120
$243
$202
$4,820
Extended
240
167
121
11,062
Graduated
240
133 7% increase (up to $240 month) every 2 yrs. based on $20,000 debt
101
13,683
Income Based
243/192
115 adjusted annually based on
income
115
15,595
Example based on 2 Direct Loans and 2 FFEL Loans with a combined total of $20,000
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Session 2 - 12
Your Role in Consolidation
Borrower Counseling:
Provide information and options to borrower
Help compare options, benefits, and programs
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Session 2 - 13
Your Role in Consolidation
Perkins Loan Schools
Complete verification certificates
Timely payoff of borrower loans
Prompt over and underpayment adjustments
Advise not to include if eligible for forgiveness
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Session 2 - 14
Eligibility Factors Borrower type
Student BorrowersParentsMarried Borrowers
Loan statusOut of school
(Includes at least one FFEL or Direct Loan)Defaulted
(Make satisfactory repayment arrangements - 3 consecutive payments)
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Session 2 - 15
Repayment Options Standard
10 yr. repayment period $50 min. monthly fixed payment
Extended 12-30 yr repayment period $50 min. monthly fixed payment
Graduated 12-30 yr. repayment period Monthly payments increase every 2
yrs. Income Based
Amount and term based on debt and income
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Session 2 - 16
Direct Consolidation Eligibility In-School
Direct Consolidation
includes at least one
FFEL and/or Direct
Loan in an in-school
period. FFEL Loan(s) - must be
attending a Direct Loan School
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Session 2 - 17
Direct Consolidation Eligibility In-School
Loan Term SAVINGS
10 years $600
12 years $720
15 years $900
25 years $1,500
Savings based on 4 Direct/FFEL with a combined balance of $20,000 brought into the weighted
average calculation at the lower in-school rate and fixed for the life of the loan.
Example: In-School/ In-Grace Consolidation
Interest Savings
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Session 2 - 18
Direct Consolidation Income Contingent Repayment Plan
Payments based on:Annual income (AGI)Family sizeTotal debt
Monthly payment changes annually as income changes
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Session 2 - 19
Direct Consolidation Electronic Tools
On-line application/promissory note On-line repayment calculator Application status look up FAQs, application materials Electronic funds transfer (EFT) Electronic signature on application Electronic Verification Certification
loanconsolidation.ed.gov
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Session 2 - 20
Direct Consolidation How Can We Help You?
1-800-557-7392
TDD 800-557-7395
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Session 2 - 21
Consolidation Loan Program
Consolidated Omnibus Reconciliation Act of 1985 (COBRA) Originally Authorized Consolidation Loan Program
HEA of 1986 and Implementing Regulations Provided Further Guidance
Many Guarantors Slow to Implement and Enroll Lenders
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Session 2 - 22
Consolidation – 1986HEA Amendments of 1986– Combine Loans with Multiple Holders
into a Single Loan– Extend Repayment Term Based on
Loan Balance– Rate = Greater of 9% or the Weighted
Average Rounded up to the Nearest Whole Percent
– Minimum Balance of $5,000
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Session 2 - 23
Consolidation – 1993HEA Amendments of 1992– Variable Rate PLUS and Direct Loans
Eligible for Consolidation– Add Loans for a Period of 180 Days– Married Couples Can Consolidate– Minimum Balance Raised to $7,500– Defaulted Borrowers Can Consolidate after
Making Satisfactory Arrangements– Eligible for Interest Subsidy while Deferred
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Session 2 - 24
Consolidation – 1994Student Loan Reform Act of 1993– Subsidy is Available only if All Underlying
Loans are Subsidized– Requires Consolidating Lenders to Pay 50
Basis Points to Make Consolidation Loans and 105 Basis Points Annually to Hold Them
– Removes Minimum Balance– Establishes Direct Consolidation Program
• Income Contingent Repayment
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Session 2 - 25
Consolidation – 1994
Student Loan Reform Act – Continued
– Removed 9% Minimum Rate Requirement
– Requires Borrower to Certify He/She Could Not Obtain Income-Sensitive Repayment Agreement from Current Holder
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Session 2 - 26
Consolidation – 1997
Emergency Student Loan Consolidation Act ’97– Direct Loans Eligible for FFELP Consolidation– For Period 11/13/97 through 9/30/98, Rate is
Identical to Stafford Rate (T-Bill Plus 3.10, not to Exceed 8.25%)
– Subsidy Paid during Periods of Deferment on Portion of Consolidation Loan made up of Underlying Subsidized Loans
– Non-Discrimination Language
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Session 2 - 27
Consolidation – 1998
Higher Education Amendments of 1998– Rate is Back to Fixed and is Weighted
Average Rounded up to the Nearest 1/8 Percent, not to Exceed 8.25%
– Can Consolidate a Consolidation Loan with New Loans
– Made Permanent Many of the Changes Brought about after Last Reauthorization
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Session 2 - 28
Consolidation – 2002
– Rate at All-Time Low (as low as 3.5%)– FFELP and FDLP Consolidation Volume
has Grown from $5.4 Billion to $10.5 Billion During the Period FFY97-FFY00
– Consolidation of Defaulted Loans Totaled $5.1 billion for FFY01, Representing over 52% of Total Collections
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Session 2 - 29
FFY01 Default Recoveries
$0
$1,000
$2,000
$3,000
$4,000
$5,000
$6,000
Traditional FFELP FDLP Total
GA
DE
Total
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Session 2 - 30
Impact of Current Environment
– Initial Intent of Loan Consolidation out the Window – Now a Refinance Tool
– Extended Repayment at Low, Fixed Interest Rates Very Costly to the Taxpayer
– Traditional Default Collection Giving Way to Consolidation/Refinancing
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Session 2 - 31
Impact of Current Environment
– Consolidation Loan Companies – Students and Schools Complain of
Rampant Marketing of Loan Consolidation– “Traditional” Lenders See Raiding of
Stafford Portfolios– Single Holder Rule Controversy
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Session 2 - 32
“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)
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Session 2 - 33
What about the borrowers?
Borrowers consolidate:– For convenience– For cash flow (some monthly only, others total cost)– To renew deferments
The Single Holder Rule and solicitations– Borrowers are an easy target (impulse buying)– Incomplete information is just as dangerous as
inaccurate information Consumer protections of some kind need to be
addressed in Reauthorization Borrower education (workshops, call centers)
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Session 2 - 34
What about the borrowers?
Borrowers consolidate:– For convenience– For cash flow (some monthly only, others total cost)– To renew deferments
The Single Holder Rule and solicitations– Borrowers are an easy target (impulse buying)– Incomplete information is just as dangerous as
inaccurate information Consumer protections of some kind need to be
addressed in Reauthorization Borrower education (workshops, call centers)
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Session 2 - 35
What about the borrowers?
Borrowers consolidate:– For convenience– For cash flow (some monthly only, others total cost)– To renew deferments
The Single Holder Rule and solicitations– Borrowers are an easy target (impulse buying)– Incomplete information is just as dangerous as
inaccurate information Consumer protections of some kind need to be
addressed in Reauthorization Borrower education (workshops, call centers)
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Session 2 - 36
Shared Responsibility Borrowers are responsible for doing their
homework, keeping good records, and not trying to buck the system
Financial aid professionals are responsible for educating their borrowers (and their staff members) and for holding the lending community accountable
Lending community is responsible for the balancing act of all time
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Session 2 - 37
What Does The Future Hold?
– Significant Changes Generally the Result of Reauthorization – Next Reauthorization Just Around the Corner
– Do We Need to Change the Consolidation Loan Program? If so, How?
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Session 2 - 38
Possible Reauthorization Changes
Pre-Default– Change Stafford Repayment Terms– Change Consolidation Interest Rate
Formula to Variable, Capped at 8.25%– Eliminate Single Holder Rule but Add
Disclosure Requirement and Marketing Restrictions
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Session 2 - 39
Possible Reauthorization Changes
Post-Default– Increase # of Payments Required to
Consolidate a Defaulted Loan– Remove ICR and Income Sensitive Option
to “Instantly” Consolidate out of Default– Decrease # of Payments Required to
Achieve Loan Rehabilitation
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Session 2 - 40
QUESTIONS?
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Student Financial Assistance