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Consolidation Loans...

This article discusses the reasons for consolidating loans, eligibility requirements, reconsolidation options, selecting a lender, maximum interest rates, weighted average interest rates, grace periods, repayment plans, deferment and forbearance options, interest subsidies, special provisions, impact on married couples, and borrower benefit programs.

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Consolidation Loans...

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  1. Consolidation Loans... The Good, the Bad and the Ugly Deborrah Glenn-Long MASFAA 2002

  2. Reasons for Consolidating • Lower monthly payments • Convenience of single payment • Convert variable rate loan to fixed interest rate • Cure a defaulted loan • Re-establish eligibility for Title IV aid • Deferment eligibility restored

  3. Loans Eligible for Consolidation • Federal Stafford Loans • Federal PLUS Loans • Federal Direct Loans (Stafford and PLUS) • Federal Perkins or National Direct Student Loans • Federal SLS/ALAS • Federal Insured Student Loans (FISL)

  4. Loans Eligible for Consolidation • Health Education Assistance Loans (HEAL) • Nursing Student Loans (NSL) • Health Professions Student Loans (HPSL) • Loans for Disadvantaged Students (LDS) • Federal Consolidation Loans…sometimes

  5. Reconsolidating • Generally, Federal Consolidation Loans cannot be reconsolidated • Two exceptions: • Borrower has obtained a new eligible loan • Borrower is consolidating existing consolidation loan with at least one other eligible loan, regardless of when that loan was made

  6. Adding More Loans • Borrower must request the addition of eligible loans within 180 days • Addition of loans may change interest rate and/or repayment term • May reconsolidate if more than 180 days have passed

  7. When? • Borrower must be in grace period or repayment status for each loan being consolidated • If in grace period, borrower has choice of delaying consolidation until end of grace period • No other Consolidation Loan applications pending

  8. Selecting a Lender • Single holder rule • Exceptions to single holder rule • Unable to obtain Federal Consolidation Loan • Lender refused to provide income-sensitive repayment schedule • Borrowers with at least two different loan holders may consolidate with any lender

  9. Maximum Interest Rate • Weighted average of the interest rates on loans being consolidated • Rounded up to nearest 1/8th percent • Fixed for the life of the loan • Will not exceed 8.25%

  10. Weighted Average Interest Rate • Step 1: Multiply outstanding balance of underlying loans by each loan’s current interest rate • Step 2: Add the totals from step 1 and divide by the total dollar amount of loans being consolidated • Step 3: Round up to nearest 1/8th percent, but not to exceed 8.25%

  11. Example • Student is consolidating $12,000 in Subsidized Stafford Loans • Borrower is in repayment with current interest rate of 4.06% on Stafford Loans • Student is also consolidating $7,000 in Perkins Loans with interest rate of 5%

  12. Step 1 • $12,000 x 4.06% = $487.20 • $7,000 x 5.00% = $350.00

  13. Step 2 • $487.20 + $350.00 = $837.20 • $837.20 ÷ $19,000 = .0441 (4.41%)

  14. Step 3 • 4.41% is rounded up to nearest 1/8th percent • Weighted average interest rate = 4.50% • Final interest rate cannot exceed 8.25%

  15. Grace Period • Weighted average interest rate for Unsubsidized Stafford Loans is calculated using interest rate that is .60 percentage points lower than interest rate when in repayment • 2002-03: 3.46% vs. 4.06% • Borrower will lose remaining grace period

  16. Repayment • Consolidation Loan enters repayment when the loan is disbursed • First payment is due within 60 days • Student chooses repayment option on the Consolidation Loan application

  17. Repayment Plans • Standard • Graduated • Income-sensitive • Extended

  18. Maximum Repayment Period Amount of Loans Maximum Term Less than $7,500 10 years $7,500 - $9,999 12 years $10,000 - $19,999 15 years $20,000 - $39,999 20 years $40,000 - $59,999 25 years $60,000 or more 30 years

  19. Deferment & Forbearance • Date of consolidation • Whether borrower included all FFEL Loans in the Consolidation Loan • Deferment eligibility of underlying loans • Extent to which borrower has already obtained deferments • Usual forbearance options still available

  20. Interest Subsidies • Borrowers retain interest subsidies on Subsidized Federal Stafford Loans • Loss of all interest subsidies on Federal Perkins Loans • Borrowers should remember that they do not have to consolidate all loans

  21. Special Provisions • Cancellation and forgiveness provisions may be forfeited • Borrowers with HEAL Loans may lose internship/residency and primary care deferments

  22. Married Couples • Joint and several liability for all loans • regardless of changes in marital status • even if spouse dies • even if spouse becomes disabled • despite discharge through bankruptcy • Both borrowers must meet requirements for deferment, forbearance or discharge (except school closure or false certification)

  23. Borrower Benefit Programs • Most borrower benefit programs are forfeited when loans are consolidated • Loss of benefits must be weighed against the advantages of converting to a fixed interest rate loan • Borrower’s point in the repayment process can be a critical factor

  24. Questions

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