Consolidation Loans Your Options Kathy Anderson MEFA

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Consolidation LoansYour OptionsKathy
AndersonMEFA
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Agenda

• Definitions
• Eligibility
• Process
• Pros and Cons
• Direct Lending and FFEL Program Options
• Marketing Campaigns
• Frequently Asked Questions

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Loan Consolidation What is it?

• Combining one or more FEDERAL loans into one new
  federally guaranteed loan
• Subsidized and unsubsidized loans retain separate
  identities
• Interest rate becomes fixed and no longer changes
  July 1 of every year
• Eliminates multiple loan holders

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Loan Consolidation Eligible loans

• Federal Subsidized and Unsubsidized Stafford
  Loans
• William D. Ford Direct Subsidized and
  Unsubsidized Loans
• Guaranteed Student Loans (GSL)
• Federal Supplemental Loans for Students (SLS)
• Federal Perkins Loans (NDSL)
• Parent Loans for Undergraduate Students (PLUS)
• Health Professions Student Loans (HPSL)
• Loans for Disadvantaged Students (LDS)
• Nursing Student Loans (NSL)
• Health Education Assistance Loans (HEAL)
• Previously Consolidated Consolidation Loans
  (including loans consolidated in-school last year)

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Why Consolidate?

• Simplifies billing when all loans are with one
  lender
• May consider consolidating with lender of private
  loans to get all loans on one bill
• Consolidation offers longer repayment terms
• Usually reduces monthly payments
• Borrower benefits offered by consolidating
  lenders
• To take advantage of the fixed interest rate
  offered on consolidation loans
• Current interest rates are far below the
  historical average and will be increasing on July
  1, 2006

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Interest Rates
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Private Loan Consolidation

• Generally NOT a good idea
• Loans already have an extended repayment schedule
• You will most likely be charged origination fees
  again, adding to the balance of your loans
• Most programs do not have fixed interest rates
• The bottom line Dont pay more for the ability
  to extend repayment on your loans! Focus on
  paying down private loans first

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Federal Loans Interest Rates

• 2005-2006 interest rate (variable)
• In-school / grace / deferment
• 91-day T-Bill 1.7 4.7
• Repayment / forbearance
• 91-day T-Bill 2.3 5.3
• Maximum rate 8.25 (cap)
• Rate changes July 1, 2006

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When to Consolidate

• NO deadline for consolidating
• Can apply at anytime
• Consider applying during grace or deferment
  periods
• Can request that processing of application be
  postponed until end of grace period
• Must provide ending date of grace period on
  application

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Consolidation Repayment Schedule

• Total Balance Term
• 9,999 or less 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
• These are maximum repayment timeframes
  borrowers may choose shorter schedule

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What Happens to My Payments?

• Assuming 20,000 federal loan balance, what are
  my monthly payments?
• Consolidated _at_ 4.75 129
• Standard 10-yr _at_ 5.3 215
• And if rates go to the maximum
• Standard 10-yr _at_ 8.25 245

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Fixed Interest Rate Calculation

• The interest rate on a consolidation loan is the
  weighted average of rates on consolidation loans
  rounded up to the nearest 1/8.
• The rate, once calculated, will never change for
  the life of the loan.

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Fixed Interest Rate Calculation

• Multiply the outstanding balance of each loan by
  its interest rate add results
• Add the outstanding loan balances together
• Divide the first result by the second result
• Round up to the nearest 1/8th percent

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Rounding Up

• 1/8 .125 5/8 .625
• 2/8 .250 6/8 .75
• 3/8 .375 7/8 .875
• 4/8 .500 8/8 the next highest full percent

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Sample Interest Rate Calculation

• Loan balances 20,000 _at_ 4.7 10,000 _at_ 5.0
• First Step 20,000 4.7 94,000
• 10,000 5.00 50,000
• 94,000 50,000 144,000
• Then 20,000 10,000 30,000
• Then 144,000/30,000 4.8, which rounds to
  4.875
• Rate without Perkins would be 4.75, so the
  difference is nominal

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The Consolidation Process

• Old loans are paid off, one new loan is created
• Subsidized and unsubsidized loans are separate
• Borrower receives an email once process is
  complete
• Repayment begins approximately 30 days after
  consolidation loan is complete

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How to Apply

• For William D. Ford Direct Loans
• Online at www.loanconsolidation.ed.gov
• FFEL Program lenders website
• (ex www.mefa.org, www.accessgroup.org)
• Process can take 30 45 days
• Factor into consolidation timing

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Consolidation Timing

• Students should investigate while in school or
  while in grace the lower rate applies
• Borrowers who consolidate while in school in the
  Direct Lending program retain full grace period
• Out of school borrowers lose remainder of grace
  period upon consolidation
• Borrower can request process to begin at the end
  of grace, but may have to make payments while
  application is being processed and may get higher
  rate

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Consolidation Timing

• Impact on Cost--20,000 Loan
• In Grace In Repayment
• 20,000 debt 20,000 debt
• T-bill 1.7 T-bill 2.3
• Weighted int. rate 4.75 Weighted int. rate
  5.375
• Repayment term 20 years Repayment term 20
  years
• Monthly payment 129 Monthly payment 136
• Total repaid 31,019 Total repaid 32,681
• Assumes
• T-bill 3
• No payment incentives

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Consolidation and Perkins

• Perkins loans can be consolidated with other
  loans, BUT
• In FFEL, the loan is treated as unsubsidized
  should the borrower go into deferment
• Borrowers become ineligible for cancellation
  provisions
• May actually increase weighted average of
  consolidation loan
• Borrowers need to determine whether or not
  consolidating Perkins outweighs paying multiple
  lenders in repayment
• Automatic debit may simplify process

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Consolidation Pros and Cons

• Pros
• Lowers monthly payments
• Locks in interest rate
• Eliminates paying multiple lenders, reducing
  payment problems
• No cost to borrower
• Borrower remains eligible for most deferment and
  cancellation provisions

• Cons
• May increase overall cost of loan because of
  extended payment schedule
• May eliminate grace period
• May change deferment options
• Cannot include private loans

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Direct Loan Consolidation Benefits

• Borrowers can consolidate while in school and
  retain the grace period
• Eliminates worries about timing around July 1st
  interest rate change
• Students not graduating can consolidate too and
  lock in the low interest rate this feature ends
  July 1, 2006
• Perkins loans remain subsidized

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FFEL Consolidation Benefits

• Lenders may offer interest rate discounts to
  students meeting certain conditions
• For example, MEFA offers a 1 interest rate
  reduction on consolidation loans after 36 on-time
  payments and .25 immediate interest rate
  reduction for auto debit
• Must wait until loans are in either grace or
  deferment status to consolidate
• Borrowers can waive their grace periods and
  request that loans go into early repayment

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Consolidation For Couples Only

• Married borrowers can consolidate loans jointly
  BUT
• Should one spouse die or become disabled, the
  other spouse is FULLY liable for the loan
• Decreases deferment options both spouses must
  meet deferment criteria to qualify
• If one spouse is unwilling to pay the other
  shoulders the entire burden (divorce situations)
• This option is no longer available beginning July
  1, 2006

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Marketing Campaigns

• Will be very aggressive this year
• Big rate increase anticipated for 2006
• There are NO deadlines to consolidate, but keep
  in mind the interest rate change
• You are forming a long-term relationship that
  CANNOT be reversed - use a reputable
  consolidation company that gives you outstanding
  service
• Do NOT use a company that makes you feel
  pressured

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Questions?

• Contact the Office of Student Financial Services
  for assistance
• Refer to FAQs
• Weigh options carefully to make the best decision
  for your situation