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

““You want to do what?”You want to do what?”A Primer on Loan A Primer on Loan

ConsolidationConsolidation

Paul S. GarrardPaul S. Garrard

Vice President, NCHELPVice President, NCHELP

NYSFAAA, 24 October 2002NYSFAAA, 24 October 2002

So, what is all the fuss about?So, what is all the fuss about?

Interest rates absolutely tanked on July 1, Interest rates absolutely tanked on July 1, 20022002

Consolidation offers a fixed (as in never to Consolidation offers a fixed (as in never to change again) ratechange again) rate

Everybody and their brother has come out Everybody and their brother has come out of the woodworkof the woodwork

No longer “should” I consolidate, more like No longer “should” I consolidate, more like “when” and “with who”“when” and “with who”

Before we get startedBefore we get started

Don’t make this more complicated than it Don’t make this more complicated than it already is, but do your homework already is, but do your homework

Summary in Greentree Gazette July 2002Summary in Greentree Gazette July 2002 look for consistency of informationlook for consistency of information Information versus adviceInformation versus advice Consolidation is really a repayment optionConsolidation is really a repayment option

Before we get started (con’t.)Before we get started (con’t.)

Incomplete information can be as Incomplete information can be as dangerous as inaccurate informationdangerous as inaccurate information

Consolidation does not have to mean Consolidation does not have to mean extended repaymentextended repayment

What we plan to coverWhat we plan to cover Some basics (in the primer)Some basics (in the primer)

What is loan consolidation?What is loan consolidation? Why do borrowers consolidate?Why do borrowers consolidate? What kind of programs are available?What kind of programs are available? How do you consolidate?How do you consolidate? When should I consolidate?When should I consolidate? Can I reconsolidate?Can I reconsolidate?

Some detail (in the primer)Some detail (in the primer) Some questions you might want to askSome questions you might want to ask

Reauthorization and loan consolidationReauthorization and loan consolidation

Some detail (questions to ask)Some detail (questions to ask)

Which loans?Which loans? Interest rate?Interest rate? Grace, deferment and Grace, deferment and

forbearance?forbearance? Interest subsidy?Interest subsidy? Borrower benefits?Borrower benefits? Repayment options?Repayment options?

Monthly and total Monthly and total repayment amounts?repayment amounts?

How are payments How are payments applied?applied?

Who is the servicer?Who is the servicer? Fees or other costs?Fees or other costs? How long will it take?How long will it take? What about spousal What about spousal

consolidation?consolidation?

Some things to consider as we Some things to consider as we move towards Reauthorizationmove towards Reauthorization

How does loan consolidation influence How does loan consolidation influence how you counsel your borrowers, and how you counsel your borrowers, and does it adversely impact your credibility?does it adversely impact your credibility?

How will loan consolidation impact lenders’ How will loan consolidation impact lenders’ pricing strategies for Stafford Loans? pricing strategies for Stafford Loans?

Should taxpayers subsidize consolidation Should taxpayers subsidize consolidation loans?loans?

What about consumer protection for our What about consumer protection for our borrowers? borrowers?

What we plan to coverWhat we plan to cover

Some basicsSome basics What is loan consolidation?What is loan consolidation? Why do borrowers consolidate?Why do borrowers consolidate? What kind of programs are available?What kind of programs are available? How do you consolidate?How do you consolidate? When should I consolidate?When should I consolidate? Can I reconsolidate?Can I reconsolidate?

What is loan consolidation?What is loan consolidation?

Paying off multiple loans with one new Paying off multiple loans with one new loanloan

Now a refinancing toolNow a refinancing tool Different than “serialization” or the Different than “serialization” or the

“combining” of loans“combining” of loans

Why do borrowers consolidate?Why do borrowers consolidate?

For convenienceFor convenience To save moneyTo save money In some cases, to extend defermentIn some cases, to extend deferment

First, for convenienceFirst, for convenience

The issue is multiple loan servicers, not The issue is multiple loan servicers, not really multiple loansreally multiple loans

Some servicers offer “combined billing”Some servicers offer “combined billing”

Second, to save moneySecond, to save money

a) reduce monthly payments (at the expense of a) reduce monthly payments (at the expense of higher total repayment) or b) reduce both higher total repayment) or b) reduce both monthly payments and total repaymentmonthly payments and total repayment

FFELP borrowers prior to October 7, 1998 must FFELP borrowers prior to October 7, 1998 must consolidate in order to access extended consolidate in order to access extended repayment (those on or after that date must repayment (those on or after that date must have a balance of $30K or more)have a balance of $30K or more)

Direct Staffords already eligible for extended Direct Staffords already eligible for extended repayment without consolidationrepayment without consolidation

Third, to extend defermentThird, to extend deferment

Some borrowers may be able to access Some borrowers may be able to access additional deferments or renew additional deferments or renew defermentsdeferments

See the primer in the section See the primer in the section Some DetailSome Detail

What kind of programs are What kind of programs are available?available?

Federal Consolidation (FFELP)Federal Consolidation (FFELP) Direct Loan Consolidation (FDSLP)Direct Loan Consolidation (FDSLP) HEAL RefinancingHEAL Refinancing

FFELP versus FDSLPFFELP versus FDSLP

Federal Consolidation (FFELP) is offered Federal Consolidation (FFELP) is offered through banks, traditional lenders, etc., through banks, traditional lenders, etc., and lenders offering Federal Consolidation and lenders offering Federal Consolidation compete against each othercompete against each other

Direct Loan Consolidation is offered by the Direct Loan Consolidation is offered by the federal government and competes with federal government and competes with Federal ConsolidationFederal Consolidation

These are both really federal programs, These are both really federal programs, which adds to the confusionwhich adds to the confusion

Who’s eligible for Federal Who’s eligible for Federal Consolidation (FFELP)?Consolidation (FFELP)?

Available to all Stafford borrowers, Available to all Stafford borrowers, including Direct Loan borrowersincluding Direct Loan borrowers

Just a tad bit of confusion about the Just a tad bit of confusion about the “Single Holder Rule”“Single Holder Rule”

““Single Holder Rule”Single Holder Rule”

FFELP borrowers with one loan holder must first FFELP borrowers with one loan holder must first contact that holder about consolidation and may contact that holder about consolidation and may only “shop” if their holder either a) does not offer only “shop” if their holder either a) does not offer consolidation or b) does not offer Federal consolidation or b) does not offer Federal Consolidation with ISRConsolidation with ISR

This is buried in the promissory noteThis is buried in the promissory note FFELP borrowers with at least two holders can FFELP borrowers with at least two holders can

“shop till they drop” (two holders does not mean “shop till they drop” (two holders does not mean Perkins)Perkins)

Will eliminating the SHR increase solicitations?Will eliminating the SHR increase solicitations? How would that impact your job?How would that impact your job?

Direct Loan ConsolidationDirect Loan Consolidation

In general, available to borrowers with at least In general, available to borrowers with at least one Direct Loanone Direct Loan

Available to FFELP borrowers out of school Available to FFELP borrowers out of school whose holder either a) does not offer Federal whose holder either a) does not offer Federal Consolidation or b) does not offer Federal Consolidation or b) does not offer Federal Consolidation with Income Sensitive Repayment Consolidation with Income Sensitive Repayment terms the borrower finds acceptableterms the borrower finds acceptable

Please don’t ask me what “acceptable” meansPlease don’t ask me what “acceptable” means

How do I consolidate?How do I consolidate?

Contact your loan holder (or servicer)Contact your loan holder (or servicer) Many borrowers now apply on the WebMany borrowers now apply on the Web Speak with your financial aid officerSpeak with your financial aid officer

So, when should borrowers So, when should borrowers consolidate?consolidate?

So, when should borrowers So, when should borrowers consolidate?consolidate?

Interest rates usually lower during school, Interest rates usually lower during school, grace, and defermentgrace, and deferment

Rates on variable rate Staffords change Rates on variable rate Staffords change July 1, usually announced late May or first July 1, usually announced late May or first week of June following the T-Bill auctionweek of June following the T-Bill auction

Watch solicitations that push consolidation Watch solicitations that push consolidation during grace if the borrower(s) you during grace if the borrower(s) you counsel may qualify for defermentcounsel may qualify for deferment

So, when should borrowers So, when should borrowers consolidate (continued)?consolidate (continued)?

In general, borrowers will get a lower rate In general, borrowers will get a lower rate if they consolidate during school, grace, or if they consolidate during school, grace, or defermentdeferment

Just remember, borrowers are hedging Just remember, borrowers are hedging their bets that the fixed rate they get will their bets that the fixed rate they get will be lower than the average rate they would be lower than the average rate they would get over the course of repaymentget over the course of repayment

What’s the deal with in-school What’s the deal with in-school consolidation?consolidation?

Be sure you know how the term “in-school” Be sure you know how the term “in-school” is being usedis being used

Is the “in-school” reference to the borrower Is the “in-school” reference to the borrower or the loan?or the loan?

In the lending community, repayment is In the lending community, repayment is defined as the day after the grace period defined as the day after the grace period expiresexpires

Seem to be exceptions to everythingSeem to be exceptions to everything

Federal Consolidation (FFELP) Federal Consolidation (FFELP) while currently enrolledwhile currently enrolled

In general, no, but …In general, no, but … You can consolidate loans that have You can consolidate loans that have

entered repaymententered repayment (previous loans whose (previous loans whose grace period has expired, with the grace period has expired, with the borrower back in an “in-school” deferment)borrower back in an “in-school” deferment)

You cannot consolidate loans you are You cannot consolidate loans you are currently receivingcurrently receiving

Talk with your loan servicer about this Talk with your loan servicer about this

Direct Loan Consolidation while Direct Loan Consolidation while currently enrolledcurrently enrolled

In general, yes, if they are eligible for DLCIn general, yes, if they are eligible for DLC You must be attending a DL schoolYou must be attending a DL school and and

include one DL or FFELP in an “in-school” include one DL or FFELP in an “in-school” period (fully disbursed), ORperiod (fully disbursed), OR

You are attending a non DL school and You are attending a non DL school and you you have at least one DLhave at least one DL and you include at least and you include at least one DL or FFELP in an “in-school” period one DL or FFELP in an “in-school” period (fully disbursed)(fully disbursed)

What about FFELP only borrowers What about FFELP only borrowers attending a non DL school?attending a non DL school?

DLC while currently enrolled in DLC while currently enrolled in school (con’t.)school (con’t.)

FFELP only borrower attending a non DL FFELP only borrower attending a non DL schoolschool may consolidate with DLC, but may may consolidate with DLC, but may only include FFELP loans that have only include FFELP loans that have entered repayment, not any loans they are entered repayment, not any loans they are currently receivingcurrently receiving

Can I reconsolidate?Can I reconsolidate?

You cannot reconsolidate or “refinance” You cannot reconsolidate or “refinance” one Federal Consolidation Loanone Federal Consolidation Loan

You can reconsolidate one DLC, but not You can reconsolidate one DLC, but not sure why you would (80 basis point sure why you would (80 basis point discount no longer applies and deferments discount no longer applies and deferments can only be renewed once)can only be renewed once)

In general, you can add loans up to 180 In general, you can add loans up to 180 days to your original consolidation loandays to your original consolidation loan

Can I reconsolidate? (con’t.)Can I reconsolidate? (con’t.)

““I’ll just keep one or two loans out, and I’ll just keep one or two loans out, and consolidate them later with my original consolidate them later with my original consolidation loan in order to take consolidation loan in order to take advantage of any interest rate drop”advantage of any interest rate drop”

Nice try, but remember that the original Nice try, but remember that the original consolidation loan already has a fixed rateconsolidation loan already has a fixed rate

Question #1 – Which loans can Question #1 – Which loans can be consolidated?be consolidated?

GSL, SLS, Stafford, PLUSGSL, SLS, Stafford, PLUS PerkinsPerkins HPSL, LDS, Nursing Student LoansHPSL, LDS, Nursing Student Loans Federal and Direct Consolidation LoansFederal and Direct Consolidation Loans HEALHEAL You cannot consolidate private loans with either You cannot consolidate private loans with either

Federal or Direct Loan ConsolidationFederal or Direct Loan Consolidation You cannot consolidate Primary Care LoansYou cannot consolidate Primary Care Loans

Question #2 – How is the Question #2 – How is the interest rate calculated?interest rate calculated?

Weighted average of all underlying loans Weighted average of all underlying loans rounded to nearest one eighth of one rounded to nearest one eighth of one percent, then fixed throughout repaymentpercent, then fixed throughout repayment

Fixed rate cannot exceed 8.25%Fixed rate cannot exceed 8.25% Same initial rate for FFELP and FDSLP Same initial rate for FFELP and FDSLP

(no more 80 basis points discount for DL)(no more 80 basis points discount for DL) Older loans may have higher ratesOlder loans may have higher rates Discounts usually have conditionsDiscounts usually have conditions

Current interest ratesCurrent interest rates

3.46% for Staffords disbursed on or after 3.46% for Staffords disbursed on or after July 1, 1998 if borrower is in school, grace, July 1, 1998 if borrower is in school, grace, or defermentor deferment

4.26% for Staffords disbursed on or after 4.26% for Staffords disbursed on or after July 1, 1995 but prior to July 1, 1998 if July 1, 1995 but prior to July 1, 1998 if borrower is in school, grace, or defermentborrower is in school, grace, or deferment

Rates are 60 basis points (.6%) higher Rates are 60 basis points (.6%) higher during forbearance and “active” repaymentduring forbearance and “active” repayment

Question #3 – What about Question #3 – What about grace, deferment, forbearance?grace, deferment, forbearance?

Let’s just forget this question and move to Let’s just forget this question and move to the next question.the next question.

Grace, deferment, forbearance Grace, deferment, forbearance with Federal Consolidationwith Federal Consolidation

Lose remaining months of graceLose remaining months of grace ““Old” borrowers (pre July 1, 1993) who Old” borrowers (pre July 1, 1993) who

consolidate all Staffords at the same time move consolidate all Staffords at the same time move to “new” status, may apply for EHDto “new” status, may apply for EHD

No internship residency defermentNo internship residency deferment ““New” borrowers do not lose remaining EHD New” borrowers do not lose remaining EHD

eligibility (and should ask about renewal)eligibility (and should ask about renewal) Graduate fellowship deferment availableGraduate fellowship deferment available Forbearance still availableForbearance still available

Grace, deferment, forbearance Grace, deferment, forbearance with Direct Loan Consolidationwith Direct Loan Consolidation

Consolidate while enrolled in school and keep Consolidate while enrolled in school and keep your grace, do it out of school and lose your your grace, do it out of school and lose your gracegrace

In general, deferments are renewed and new In general, deferments are renewed and new deferments (EHD) availabledeferments (EHD) available

Get both pre and post July 1, 1993 deferments if Get both pre and post July 1, 1993 deferments if you include at least one pre July 1, 1993 loanyou include at least one pre July 1, 1993 loan

Graduate fellowship deferment availableGraduate fellowship deferment available Forbearance still availableForbearance still available

Question #4 – Do you keep the Question #4 – Do you keep the subsidy during deferment?subsidy during deferment?

yesyes on Sub Staffords on Sub Staffords nono on Perkins with Federal Consolidation on Perkins with Federal Consolidation yesyes on Perkins with Direct Loan on Perkins with Direct Loan

ConsolidationConsolidation nono on HPSL and LDS in both Federal and on HPSL and LDS in both Federal and

Direct Loan ConsolidationDirect Loan Consolidation

Question #5 – What about Question #5 – What about repayment benefits?repayment benefits?

In general, you lose them because they In general, you lose them because they were attached the loan, and now the loan were attached the loan, and now the loan no longer existsno longer exists

Some lenders offer them on consolidation Some lenders offer them on consolidation loans, just know the conditions (and the loans, just know the conditions (and the grace period for late payments)grace period for late payments)

Remember what may happen to up front Remember what may happen to up front pricing if consolidation remains all the ragepricing if consolidation remains all the rage

Question #6 – What are the Question #6 – What are the repayment options?repayment options?

In general, all repayment options should In general, all repayment options should be available, including:be available, including: Standard (Level) Standard (Level) GraduatedGraduated Income Based (ISR or ICR)Income Based (ISR or ICR) Extended RepaymentExtended Repayment

Question #7 – What are both Question #7 – What are both the monthly and total amounts?the monthly and total amounts?

Ask your consolidating lenderAsk your consolidating lender Use repayment calculators on the WebUse repayment calculators on the Web Use software if your loan program Use software if your loan program

provides itprovides it

Question #8 – Can I pay early, Question #8 – Can I pay early, how are payments applied?how are payments applied?

No penalty for early repaymentNo penalty for early repayment In general, payments on federal loans are In general, payments on federal loans are

applied first to any collection costs, second applied first to any collection costs, second to any accrued and capitalized interest, to any accrued and capitalized interest, and third to any remaining principaland third to any remaining principal

Check with the servicer of the Check with the servicer of the consolidation loan about thisconsolidation loan about this

Question #9 – Who will service Question #9 – Who will service my consolidation loan?my consolidation loan?

Ask your consolidating lenderAsk your consolidating lender Financial aid officers, time to shineFinancial aid officers, time to shine What kind of comfort level do you have What kind of comfort level do you have

with this servicer?with this servicer?

Question #10 – What about Question #10 – What about fees?fees?

What about them, there should be noneWhat about them, there should be none Often referenced in marketing materialsOften referenced in marketing materials

Question #11 – How long will Question #11 – How long will this take?this take?

You may hear 45 to 60 days, depending You may hear 45 to 60 days, depending on how many lenders are involvedon how many lenders are involved

Web should help speed things upWeb should help speed things up Keep status on loans current during Keep status on loans current during

consolidation processconsolidation process Be sure you know what rate will be used Be sure you know what rate will be used

on loans you are consolidating when the on loans you are consolidating when the new fixed rate is determinednew fixed rate is determined

Question #12 – What about Question #12 – What about spousal consolidation?spousal consolidation?

NBC miniseries just waiting to happenNBC miniseries just waiting to happen Both parties become jointly and severally Both parties become jointly and severally

liableliable Spouse must repay if partner diesSpouse must repay if partner dies Can adversely impact deferment optionsCan adversely impact deferment options Some consolidating lenders do not offer Some consolidating lenders do not offer

spousal or joint consolidationspousal or joint consolidation

Some things to consider as we Some things to consider as we move towards Reauthorizationmove towards Reauthorization

How does loan consolidation influence How does loan consolidation influence how you counsel your borrowers, and how you counsel your borrowers, and does it adversely impact your credibility?does it adversely impact your credibility?

How will loan consolidation impact lenders’ How will loan consolidation impact lenders’ pricing strategies for Stafford Loans? pricing strategies for Stafford Loans?

Should taxpayers subsidize consolidation Should taxpayers subsidize consolidation loans?loans?

What about consumer protection for our What about consumer protection for our borrowers? borrowers?

Thanks, and best wishes Thanks, and best wishes from your friends at from your friends at

NCHELP!NCHELP!________

www.nchelp.orgwww.nchelp.org

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

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