Consolidation Loans: Problem or Solution

1
Consolidation Loans Problem or Solution

• Presentation of John Dean before the Annual
  Meeting of the Coalition of Higher Education
  Assistance Organizations
• January 26, 2004

2
Consolidation Loans

• The Consolidation Loan Program was created in the
  1980s to
• Allow borrowers with multiple holders to
  consolidate loans into a single account to
  facilitate repayment.
• Allow heavily indebted borrowers relief from high
  monthly payments through an extended repayment
  period.

3
Consolidation Loans

• In the 1980s through the 1998 reauthorization,
  the borrower interest rate on consolidation loans
  was higher than that on regular Stafford Loans.
• The idea was that borrowers should pay something
  for getting a longer amortization period.

4
Consolidation Loans

• 1998 Reauthorization
• The crisis at the Direct Loan Consolidation
  Servicing Center lead to Congressional focus on
  the program.
• Without fully appreciating how the program would
  work in a low interest rate environment, Congress
  changed the program to offer fixed rates based on
  the weighted interest rate of the loans
  consolidated.

5
Consolidation Loans

• Current Environment
• Record low interest rates, resulting from federal
  policy measures and 9/11, have made consolidation
  loans extremely attractive for the past two
  years.
• Borrowers can secure fixed, long term interest
  rates as opposed to variable rates outside of
  consolidation.

6
Consolidation Loans

• Interest rates on Federal Consolidation Loans
  have dropped to as low as 3.5 for borrowers in
  repayment, and 2.875 for recent graduates in
  their grace period - the lowest levels in the
  37-year history of the federal student loan
  program.

7
Consolidation Loans

• The emergence of an extremely attractive
  consolidation loan product led to new, aggressive
  entrants to the FFEL marketplace who have
  employed modern, efficient marketing techniques
  to reach hundreds of thousands of borrowers,
  alerting them that the loans are available.

8
Consolidation Loans

• FY 2002 consolidation loan volume totaled
• 31.5 billion, 22.7 billion of it in the FFEL
  program.

9
Consolidation Loans

• Why is this a bad thing?
• Federal costs are sky-rocketing. The
  Congressional Budget Office, for example,
  estimated that the cost of the student loan
  programs tripled from 3 billion to 9 billion in
  FY 2003, largely because of loan consolidation.
• Money spent on consolidation loans is not
  available for student loans.

10
Consolidation Loans

• The Federal Government assumes great rate-risk
  by making very long-term loans carrying fixed
  interest rates that, in some cases, are below 3
  percent.
• A rising rate environment would result in the
  cost of the student loan programs skyrocketing.

11
Consolidation Loans

• Solutions
• The Coalition for Better Student Loans, whose
  members include ACE, AAU, NASULGC, NAICU, and
  NASFAA as well as various FFEL interest groups,
  supports reform of the Consolidation Loan
  Program.
• See www.betterstudentloans.org.

12
Consolidation Loans

• CBSL Consolidation Loan Proposals
• Borrower interest rate should be matched to
  Stafford Loan interest rate (both should be
  either fixed or variable).
• Borrowers should have additional repayment relief
  outside of consolidation through the availability
  of extended repayment periods on Stafford Loans.

13
Consolidation Loans

• CBSL Consolidation Loan Proposals continued
• Borrowers should have access to special repayment
  relief during the first two years of
  repaymentdiscouraging them from consolidating if
  monthly repayment relief is available for these
  first two critical years.

14
Consolidation Loans

• CBSL Loan Consolidation Proposals continued.
• The single holder rule should be maintained.
• Borrowers should pay a small origination fee on
  consolidation loans to offset the costs
  associated with extending repayment.

15
Consolidation Loans

• CBSL Loan Consolidation Proposalscontinued.
• Borrowers should receive full information on the
  impact of consolidation loans on their finances.
• Borrowers Need to Know What They are Getting Into
  with Consolidation Loans.

16
Consolidation Loans

• Institutional Perspectives
• Borrowers that need consolidation should have
  access to it. But the loans should not be
  promoted for those borrowers that do not have
  need.
• Extending student loan repayment is not doing
  borrowers a favor. Borrowers are best off paying
  off their loans in the shortest possible time.

17
Consolidation Loans

• Institutional Perspectives
• Borrowers still repaying their student loans are
  less likely to make alumni contributions.
• Borrowers still repaying their loans are less
  likely to save for their own children to go to
  college.

18
Consolidation Loans

• Institutional Perspectives
• Scarce Federal resources available for education
  loans should be focused on students, not on
  borrowers in repayment that might not need
  additional federal subsidies.
• Expansion of consolidation loans risks subsidies
  on student loans.

19
Consolidation Loans

• Loan Provider Perspectives
• When lenders lose loans from their portfolio
  through consolidation, offering up-front benefits
  to borrowers becomes more difficult.
• If you are likely to lose your loan just as it
  enters repayment, your projected earnings are
  insufficient to support up-front benefits.

20

• What To Do?
• Review the proposals on loan consolidation (and
  other subjects) of the Coalition for Better
  Student Loans.
• If you agree with them, let your Congressional
  representatives know.
• Let your Washington-based associations know your
  position on consolidation loan issues.
• Consider having your institution issue an
  endorsement of the proposals.

21
Loan Consolidation

• Thank You.
• Questions?
• John Dean
• Washington Partners, LLC
• jdean_at_wpllc.net
• [phone].