Understanding The Complexities Of The Consolidation Loan Program

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Understanding The ComplexitiesOf The
Consolidation Loan Program!
Mirroring Excellence Welcome to NYSFAAA
Conference XXXVIII
Presenter Maureen Fitzgerald Senior Strategic
Business Development Director NextStudent November
7, 2006 www.mfitzgerald_at_nextstudent.com www.nexts
tudentloans.com
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Topics For Discussion

• Todays Presentation Includes
• When Consolidation Lending Began/Why?
• Why is Consolidation So Complex for The
  Borrowers?
• A Few Facts
• Borrowers Concerns
• Consolidation Tools Resources

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When Consolidation Lending Began/Why?
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Complexities of Consolidation Program Changes

• Some Major Program Changes
• Repeal of single holder rule choices!
• Changes in interest calculations
• Fixed interest rate based on weighted average
  rounded up the nearest 1/8
• Student interest rate capped at 8.25 (FFELP)
  6.80 (Direct Loan)
• Parent interest rate capped at 8.50 (FFELP)
  7.90 (Direct Loan)

• Why Are Students Confused?
• Financially in-experienced to evaluate loan
  programs.
• Agressive lender direct mail promotions-
  print/radio ads - other media.
• Confusion - clouding ability to make best
  financial decision.
• Limited knowledge lack of financial resource
  information.
• Lender choices not often recommended.
• No access to non-partisan Financial Consolidation
  Specialist- loan consultants

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A Few Facts On Student Loan Debt

• 
  

• Average Borrower Indebtedness
• Federal Loan Volume Distribution
• Consolidation Federal Loan Volume
• COHORT Default Rates
• Consolidation Interest Rates

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Average Borrower Indebtedness

• Average Borrower ABIs
• Average Undergraduate ABIs
• 19,300
• Average Graduate/Professional ABIs
• 35,000

Source - National Student Loan Reported Trends
AY 2005-06
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Federal Loan Volume Distribution

• 17B - Estimated Private Educational Loans
  Disbursed!
• 13 Total Federal Aid
• 25 Total Federal Loan Disbursed

68.6B - Estimated Federal Loans Disbursed! 51
Total Federal Aid
Total Federal Aid 134.8B
Source - College Board Academic Yr. 2005-06
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Cohort Default Rates
22.4
4.5
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Federal Consolidation Loan Volume

ABI
Volume (BUSD)
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Consolidation Interest Rates
These rates are based on Stafford loan
repayment rates for the given academic year
SOURCE FinAid
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Weighted Average

• The Federal Consolidation Loan interest rate is a
  weighted average of the rates on the loans being
  included in consolidation and is rounded to the
  nearest 1/8 of a percent, not to exceed 8.25.
• Weighted Average means that the interest rate
  on a large loan counts more in the average than
  the interest rate on a smaller loan.

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Weighted Average Formulas

• Formulas
• 1/8 .125
• 2/8 .250
• 3/8 .375
• 4/8 .500
• 5/8 .625
• 6/8 .750
• 7/8 .875
• 8/8 1.00

Weighted Average
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Consolidation Impact on Borrower
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Consolidation Impact on Borrower
Applicable for loans with variable rates
disbursed prior to July 1, 2006.
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Borrowers Concerns

• What Borrowers Are Most Concerned About?
• Should A Perkins Loan Be Consolidated?
• Quick Summary Of The Benefits of Consolidation!

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Whats Borrower Are Most Confused About?

• The QAs
• 1. Are there any minimum balances requirements?
• Some lenders require a minimum balance before
  accepting a consolidation loan. Typically
  7,500, although some lenders will allow a
  borrower to consolidate with a 5,000 balance.
  The Federal Direct Consolidation Loan program
  does not have minimum balance.
• Will a consolidation loan affect a borrowers
  credit rating?
• NoEducation debt is considered good debt. It
  generally increases the borrowers ability to earn
  money to repay their debt responsibly. Note
  Even though consolidation increases the loan
  terms it typically does not change a borrowers
  repayment behavior. Defaulting on a
  consolidation loan will negatively impact the
  borrowers credit rating!

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Whats Borrower Are Most Confused About?

• The QAs
• Where should I recommend a new graduate go for a
  consolidation?
• Since the recent repeal of the single holder
  rule, a new graduate can consolidate with any
  lender. Recommend the borrower talk with their
  current holder first, however shopping around for
  the best interest rates may have financial
  benefits. The consolidation process is all
  similar with every lender, and educating the new
  graduate that choices are available may help them
  obtain better loan discounts in addition to
  better customer service.
• What are the financial benefits achieve through
  consolidation?
• The borrower has the ability to shop around.
  Federal law sets the interest rate terms, which
  is the maximum interest rate. A lender can
  reduce these rates, many offer loan discounts
  for ACH direct debits from a bank account,
  making on-time payments including interest-rate
  lock-in benefits.

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Whats Borrower Are Most Confused About?

• The QAs
• 5. How does a lock-in feature benefit the
  borrower?
• Most borrower interest rate discounts require
  the borrower to make on-time monthly payments
  if a single payment is late the borrower loses
  the interest rate incentive. It is estimated
  less then 10 of all borrowers successfully
  obtain the full benefit of achieving the short
  term discount. A lock-in feature typically
  means that the borrower cant lose the discount
  benefit if a payment is missed. A lock-in
  feature is an excellent cost savings benefit for
  the borrower. Typically theses programs become
  effective when the borrower meets the on-time
  scheduled payment requirement, and the new
  adjusted interest rate is locked in for the
  life-of-the-loan. Without a lock-in feature
  after one payment is missed the incentive
  eligibility terminates for the life-of-the-loan
  and reverts back to the original interest rate..

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Whats Borrower Are Most Confused About?

• The QAs
• What are the benefits for a Parent PLUS Borrower?
• A parent borrower should be encouraged to
  consolidate there are financial savings it
  will reduce the interest rate from 8.50 to 8.25
  due to the consolidation interest rate cap.
• Can a borrower reconsolidate?
• YesIF its not a consolidation loan and the
  borrower is adding more loans or a single loan to
  the consolidation. It must be a federal loan.
  Note Reconsolidating a consolidation loan does
  not relock the interest rates on the loan.
• Can an in-school borrower consolidate their
  loans?
• Nothe early repayment status loophole for
  FFELP and Direct Loans was repealed - effective
  7/1/2006. The borrower can consolidate during
  their grace period or after they have entered
  into a repayment status.

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Whats Borrower Are Most Confused About?

• The QAs
• 9. What happens to the earned lender incentive
  discounts when a borrower consolidates?
• A consolidation loan is similar to a refinanced
  loan that pays off the original federal loans.
  When/if the borrower consolidates they will lose
  any existing loan discounts and especially if
  they change lenders. Note If the borrower is
  consolidating a Direct Federal loan (s) they may
  have to repay the 1.50 rebate obtained if they
  consolidate with a FFELP (bank-based) program.
• 10. Can a borrower consolidate their Private
  Education Loans?
• NoOnly approved federal loans. Some lenders
  offer a Private Consolidation loan program, and
  in many cases at a higher cost of interest.
  Note Typically the Private Consolidation
  programs allow the borrower to co-consolidate
  federal and private loans, this is not
  recommended it will result in the loss of the
  federal consolidation deferment entitlements
  including loan fees and a higher interest rate!

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Should A Perkins Loan Be Consolidated?

• Consider The Program Features
• Fixed 5 interest rate - life of the loan-lower
  than federal loan.
• 9 month grace-period 3 months longer standard 6
  month period.
• Should borrowers opt to omit - lower fixed
  interest rate - longer deferment term?

• Helping Borrower s Make Intelligent Evaluations
• How the mix of different rates affect weighted
  average?
• Borrower wont lose benefit of low fixed rate-
  rates may be higher but life-of-loan will be
  similar
• .
• If borrower omits Loan what is the adverse
  consequences?
• Including the Perkins will simplify loan
  repayment- borrowers wont have to make a
  separate payment.

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Summary-How Consolidation Helps Borrowers?

• Some important features?
• Alternative repayment plans
• Graduated repayment
• Income contingent FFELP
• Income sensitive repayment Direct
• Reduces the borrowers monthly payment
• No fees
• Interest rate cap
• Extended Repayment Terms
• Interest Rate Lock-In options
• Loan discounts/incentives
• Ability to select a new lender partner

• Some Important benefits?
• Terms extended 12 to 30 yrs. depending on loan
  amount.
• Reduced monthly payment - easier to repay
• Loan deferment options - suspend monthly payment.
• No pre-payment penalties pay-off loan at
  anytime.
• Ability to shop around select most
  competitive program.
• Other options lock-in borrower will not
  lose incentives earned for missed
  payments/deferments applied

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Consolidation Tools Resources

• Loan Calculator Tools
• Other Helpful Resources Tools

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Tools - Loan Consolidation Calculators

• Compare Monthly Payments!
• Recommend - use a consolidation loan calculator
  to compare the monthly payments.
• Consider interest rates - total cost of current
  standard loan repayment schedule.
• Recommend calculate a standard, extended
  graduated payment schedule first.
• Provide Choices - help students make informed
  decisions- on-line web links-printed resource
  material and more!
• Important calculators do not typically include
  a calculation for income contingent repayment!

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Other Helpful Borrower Information Resources

• Encourage - shop around look for the most
  competitive programs customer service
• Encourage - speak directly to qualified
  Consolidation Specialists applying on-line
  may be convenient - does not provide consultant
  services needed for informed decisions!
• Helpful Web-links - provide on-line
  consolidation loan links.
• Direct Lending participates - visit US
  Department of Educations web-site.

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Consolidation Loan On-Line Calculator FINAID.ORG
www.finaid.org Consolidation Loan On-Line
Calculator