Consolidation – benefits and considerations

Michelle Anderson

Senior Policy Advisor, Policy and Regulatory Affairs

Sam Wilson

Assistant Vice President, Customer Assistance

Learning objectives

• Understand the basics of the regular (non-temporary) Consolidation loan program

• Provide borrowers with factors they should consider before choosing to consolidate their loans

• Understand provisions of the new, temporary consolidation provisions created by the Health Care and Education Reconciliation Act of 2010

What is consolidation?

• Enables borrower to combine one or more federal student loans into a single new loan with one holder

• At the time of consolidation, lender or ED pays off outstanding balances of loans included in the consolidation

Life of a Consolidation loan application

Borrower completes Consolidation application and submits to consolidating lender

Consolidating lender or ED obtains Loan Verification Certificates (LVCs) from loan holders

Consolidating lender determines principal balance and calculates interest rate based on LVCs

Consolidating lender pays underlying loan holders; these loans reported as paid in full by consolidation

First payment due within 60 days of date Consolidation loan is disbursed

Who can consolidate? Is there a fee?

• Any federal student loan borrower, including:

– Borrowers with student loans

– Borrowers with parent loans

– Borrowers with student and parent loans

• There is no fee to obtain a Consolidation loan

What loans may be consolidated?

FFELP Loans

• Stafford• PLUS• SLS• Consolidation

Direct Loans

• Stafford• PLUS• Consolidation

What loans may be consolidated?

• Federally Insured Student Loans

• Federal Perkins Loans

• Health Professions Student Loans

• Nursing Student Loans

• Health Education Assistance Loans

What loans may not be consolidated?

• Private (alternative) education loans

• Other consumer debt

Can a borrower “reconsolidate”?

Generally, no:

• However, a borrower may consolidate an existing Consolidation loan with another eligible loan (including another Consolidation loan)

• A borrower may consolidate a FFELP Consolidation loan into a Direct Consolidation loan in certain circumstances

Reconsolidating into Direct Lending

• A FFELP Consolidation loan borrower may consolidate loan into a Direct Consolidation loan for purposes of:– Obtaining the benefit of public service loan forgiveness– Seeking an income-contingent repayment (ICR) or income-

based repayment (IBR) plan if the borrower’s loan holder has requested default aversion assistance from the guarantor

– Seeking an ICR or IBR plan (if the borrower has filed an adversary complaint in a bankruptcy proceeding)

How does a borrower qualify?

• Must be in grace period or in repayment

– No grace for a Grad PLUS loan; borrower can consolidate while in school because loan is in repayment

– Repayment includes deferment periods

• May be delinquent or in default on one or more

existing loans

Consolidating a defaulted loan

The borrower must do one of the following:

• Make satisfactory repayment arrangements – Three (3) consecutive, on-time, voluntary monthly payments

• Agree to repay the Consolidation loan under an IBR plan in FFELP or an ICR or IBR plan in Federal Direct Loan Program (FDLP)

Repayment options

• Standard

• Graduated

• Extended (available for borrowers with over $30,000 in debt)

• Income-based (if no parent PLUS loan is included)

• Income-sensitive (FFELP)

• Income-contingent (FDLP)

Repayment periods

Maximum repayment periods for Consolidation loans

Sum of Consolidation loan balance plus Maximum repayment period balances of other education loans

Less than $7,500 10 years

$7,500 or more, but less than $10,000 12 years

$10,000 or more, but less than $20,000 15 years

$20,000 or more, but less than $40,000 20 years

$40,000 or more, but less than $60,000 25 years

$60,000 or more 30 years

How is the interest rate calculated?

Weighted average of interest rates on loans being consolidated, rounded up to nearest 1/8 of one percent, capped at 8.25%

Consolidation calculator

• On TG Online at:

http://www.tgslc.org/borrowers/consolidate/calculator.cfm• Enter loan amounts and current interest rates

• Provides Consolidation loan interest rate and expected monthly payment under various repayment plans

Factors to consider before consolidating

What students need to know

Benefits

• Brings together loans with multiple lenders for convenience of one payment

• May lower loan payments by lengthening repayment period

• May be able to lock in a more favorable interest rate (for loans with a variable interest rate, if those rates are low during the year the borrower consolidates)

Considerations

• May lose some or all of grace period

• May lose certain borrower benefits

• Perkins loans lose: – Deferment subsidy when consolidated

– Cancellation eligibility when consolidated

Considerations

• Certain deferments may be lost, but these older deferments are not used frequently

• Borrowers retain ability to request most major deferments after consolidation– In-school

– Unemployment

– Economic hardship

Considerations

• Not eligible for IBR if parent PLUS loan is included in a Consolidation loan

• Clock starts over regarding IBR payments that count toward the 300 payments for IBR loan forgiveness

Considerations

• May increase total cost of loan– If borrower lengthens repayment period,

will pay more interest over life of the loan

$60,000 Consolidation loan @ 6.875% interest rate…

… Repaid over Monthly payment

Total amount paid

Total interest paid

10 years $692.79 $83,134.99 $23,134.99

15 years $535.11 $96,320.27 $36,320.27

20 years $460.69 $110,565.16 $50,565.16

30 years $394.16 $141,896.62 $81,896.62

New temporary loan consolidation authority

Health Care and Education Reconciliation Act of 2010

Temporary loan consolidation authority

• New, temporary loan consolidation authority created by the Health Care and Education Reconciliation Act of 2010

• For Consolidation loan applications received by ED on or after July 1, 2010, and before July 1, 2011

Eligibility

• Borrower must have loans in at least two of the following categories– Federal Direct loan,

– FFELP loan held by a lender

– FFELP loan held by ED (ECASLA “PUT” loan)

• Borrower must have at least one eligible loan in the above categories that has not yet entered repayment (this includes loans in a grace period)

Terms and conditions

• Direct Consolidation loan made under this authority has the same terms and conditions that apply to regular Consolidation loans, except– The weighted average interest rate applied to a

Consolidation loan made under this provision will not be rounded up to the nearest 1/8th of one percent

• However, if the Consolidation loan includes one or more variable rate Stafford loans made July 1, 1994 - June 30, 2006, the weighted average is rounded up to the nearest 1/8th of one percent

Benefits

• A borrower can obtain a single loan with a single holder before repayment begins

• The weighted average interest rate is not rounded up to the nearest 1/8th percent unless a variable rate Stafford loan made July 1, 1994 – June 30, 2006 is included in the Consolidation loan.

Considerations

• A Stafford loan borrower will lose the six-month grace period if he or she consolidates while in school

• Parent and Grad PLUS borrowers will lose the six-month post-enrollment deferment benefit if they consolidate while in school

• A borrower who consolidates while in school has not received exit counseling, therefore may not have enough information to make an informed decision

Considerations

• The main purpose of this temporary authority is to allow borrowers who may have lender held FFELP, Direct, and ED held FFELP “PUT” loans to have them combined into a single loan

• The regular consolidation loan program may continue to be used—it has not gone away.– However, all of the loans that are being consolidated must

have entered repayment prior to consolidation

Outstanding questions

• If a borrower qualifies for a Consolidation loan under the temporary authority, can he or she also include other Title IV loans in the same consolidation loan?

• Can a borrower add other loans during the 180-day period after the Consolidation loan is made?

• Can a loan made under this authority be re-consolidated with other loans in the future?

Resources

TG Online

• For schools page (Integrated HEA):– http://www.tgslc.org/policy/hea.cfm

• For borrowers page (Consolidation):– http://www.tgslc.org/borrowers/consolidate/

• Direct Consolidation Loan Program:– https://loanconsolidation.ed.gov/AppEntry/apply-online/

appindex.jsp

Questions?

This presentation is available for download at

www.tgslc.org/tgconference.