masfap – spring conference 2006 caution: merging loans ahead – for consolidation info, tune to...
TRANSCRIPT
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.
2005
Interest ratesrise nearly 2%.
ED confirms 2006*
borrowers may New legislation
2001 waive in-school bars DL and
1992-1998 T-bills fall 2004 status to con- FFELP in-school
A series of legislative dramatically. 2003 Stafford solidate before consolidation
initiatves change rate Stafford, T-bills go and PLUS grace. Lenders after 6/30/06,
Congress formulas for Stafford, PLUS rates 2002 even lower. rates drop also allowed keeps fixed-rate
enacts Plus, and Federal drop 2.2% T-bills fall Stafford, one more to award pre- consolidation
Federal Consolidation loans. on July 1. to 40-yr and PLUS time, but July rates to formula, bars
Consolidation Other rule changes lows. rates rising T-bill "substantially re-consolidation,
Loan Program affect Stafford/PLUS Stafford drop by rates at mid- completed" ends spousal
in effort to loan limits, interest 9/11 and PLUS more than year suggest applications consolidation.
reduce subsidy benefits and Tragedy rates drop a half student loan received by Single-holder default rate lender eligibility for pushes 1.93% on percentage rate slide lender by rule has not yet and costs. consolidation loans. rates down. July 1. point. is over. June 30. been eliminated.
1985
1990
1995
2000
2001
2002
2003
2004
2005
2006
1986
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
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 1/8th 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
$37,000
C $37,000 x 0.02875 = $1,064ON $18,500 x 0.047 = $870SO $6,000 x 0.05 = $300LI $18,500 $61,500 $2,233DA STAFFORD $2,233 ÷ $61,500 = 0.0363TI $6,000 or 3.6313ON PERKINS
2.875% 4.7% 5%
Note: Special rules apply to consolidation loans that includeHEAL loans
What is Weighted Average?
3.63% rounded up to thenearest 1/ 8 % = 3.750%
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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
CAUTION ALERT WARNING
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”?Initial
BalanceStandard 10-Year
Plan Total Pay-back
Standard Monthly Payment Amount
Consolidation level Monthly
Payment Amount
Monthly Payment Amount
Difference
Total Pay-back Cost Difference
(A) (B) (C) (B - C) (D - A)
$10,000 $13,810 $116 $78 $14,001 15 years $38 $191
$20,000 $27,620 $231 $130 $31,019 20 years $101 $3,399
$50,000 $69,049 $576 $286 $85,518 25 years $290 $16,469
$100,000 $138,097 $1,151 $522 $187,794 30 years $629 $49,697
$150,000 $207,145 $1,727 $783 $281,690 30 years $944 $74,545
$200,000 $276,193 $2,302 $1,044 $375,587 30 years $1,258 $99,394
Consolidation Level Repayment Plan Total Pay-back
(D)
* Calculations assume a repayment interest rate of 6.80% for unconsolidated loans, 4.75% for consolidation loans, and maximum payback periods.
Interactive calculators help borrowers compare and consider different options.
Many FFEL Lenders Offer Consolidation Calculators www.mohela.com www.smartloan.com www.usafunds.org
Direct Loans
Visit www.loanconsolidation.ed.gov 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: www.nslds.ed.gov
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, 2005 - 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-05-08
http://www.ifap.ed.gov/dpcletters/GEN0508.html• NCHELP Questions and Answers document available at
http://www.ifap.ed.gov/dpcletters/attachments/GEN0508Attach.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 1st 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. 1614 & 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 109-171)• 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 1st, 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-Month T-Bill Rate Trend -- May 31, 2005 - Present
3.00%
3.25%
3.50%
3.75%
4.00%
4.25%
4.50%
4.75%
Weekly Auction
Inte
rest
Rate
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?
2006-07 interest rates are based on: 02/27/06 T-Bill Auction
Stafford & PLUS Interest Rates, July 1998 to Present
8.26%
7.72%
8.99%
6.79%
4.86%
4.22% 4.17%
3.37%
2.77%
6.10%
7.73%
5.30%
8.19%
6.92%
7.46%
4.06%
3.42%
5.99%
6.93%
4.70%
7.59%
6.32%
6.86%
5.39%
3.46%2.82%
6.33%
0.00%
1.00%
2.00%
3.00%
4.00%
5.00%
6.00%
7.00%
8.00%
9.00%
10.00%
1998-991999-00
2000-012001-02
2002-032003-04
2004-052005-06
2006-07??
Financial Aid Award Year
Inte
res
t R
ate
PLUS Loans
Stafford Loans in Repayment
Stafford Loans in Grace Source: U.S. Treasury Department, Bureau of the Public Debt; U.S. Department of Education
What if interest rates go up?
Interest Rate
Outstanding Balance
Standard Monthly Payment Amount
Total Interest
Total Repay Amount
$6,000 10 yrs$6,000 10 yrs
$3 $354 $6,000 10 yrs
$6 $718
6.750% $69 $2,267 $8,267
5.750% $66 $1,903 $7,903
4.750% $63 $1,549 $7,549
What if interest rates go up?
Interest Rate
Outstanding Balance
Standard Monthly Payment Amount
Total Interest
Total Repay Amount
$8,000 12 yrs$8,000 12 yrs
$5 $582 $8,000 12 yrs
$9 $1,183
6.750% $82 $3,694 $11,694
5.750% $78 $3,093 $11,093
4.750% $73 $2,511 $10,511
What if interest rates go up?
Interest Rate
Outstanding Balance
Standard Monthly Payment Amount
Total Interest
Total Repay Amount
$15,000 15 yrs
$15,000 15 yrs
$8 $1,420 $15,000 15 yrs
$16 $2,891
$7,421 $22,421
6.750% $133 $8,893 $23,893
4.750% $117 $6,001 $21,001
5.750% $125
What if interest rates go up?
Interest Rate
Outstanding Balance
Standard Monthly Payment Amount
Total Interest
Total Repay Amount
$35,000 20 yrs
$35,000 20 yrs
$19 $4,692 $35,000 20 yrs
$40 $9,588
6.750% $267 $28,871 $63,871
5.750% $246 $23,975 $58,975
4.750% $227 $19,283 $54,283
What if interest rates go up?
Interest Rate
Outstanding Balance
Standard Monthly Payment Amount
Total Interest
Total Repay Amount
$50,000 25 yrs
$50,000 25 yrs
$29 $8,848 $50,000 25 yrs
$60 $18,119
4.750% $286 $35,518 $85,518
5.750% $315 $44,366 $94,366
6.750% $346 $53,637 $103,637
What if interest rates go up?
Interest Rate
Outstanding Balance
Standard Monthly Payment Amount
Total Interest
Total Repay Amount
$75,000 30 yrs
$75,000 30 yrs
$46 $16,720 $75,000 30 yrs
$95 $34,277
4.750% $392 $65,845 $140,845
5.750% $438 $82,565 $157,565
6.750% $487 $100,121 $175,121
What if interest rates go up?
Interest Rate
Outstanding Balance
Standard Monthly Payment Amount
Total Interest
Total Repay Amount
$125,000 30 yrs
$125,000 30 yrs
$77 $27,866 $125,000
30 yrs
$158 $57,128
4.750% $653 $109,741 $234,741
5.750% $730 $137,608 $262,608
6.750% $811 $166,869 $291,869
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