2007 Sallie Mae, Inc. All Rights Reserved LOAN CONSOLIDATION . . . . . . why won’t it just go away? Chris Simmerman - Vice President, Campus Programs, Sallie Mae Greg Diamond – Manager, Loan Consolidation, MOHELA MASFAP Spring Conference 2007 March 7 – 9, 2007
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• Many factors influenced the tremendous demand– Another significant increase in variable interest rates– Impending elimination of in-school / early repayment
consolidation options– Elimination of single holder rule– Intense marketing to borrowers
• Run up to July 1st this year was much like last year, but things went smoother– Industry was better prepared– Borrowers were more familiar with process– Schools / lenders / guarantors were able to provide
• Effective July 2006, the following changes directly affected Federal Student Loan Consolidation:– Elimination of in-school consolidation in DL and early
repayment consolidation in FFEL• Consolidation permitted only when loans are in a grace or
repayment status, including deferment or forbearance
– Elimination of spousal consolidation– Termination of consolidation eligibility upon receipt of a
consolidation loan in either the FFEL or DL program, unless borrower meets certain specific conditions
– Mandates parallel terms between FFEL and DL consolidation loans (except as explicitly noted)
• Consolidation interest rate– Fixed weighted average of the loans consolidated, rounded up to
the nearest 1/8th percent, with a maximum rate of 8.25%
$25,625 $25,625 x 0.02875 = $737
$12,000 x 0.08500 = $1,020CO $8,000 x 0.06800 = $544NS $6,500 x 0.06540 = $425OL $5,000 x 0.05000 = $250I $12,000D $57,125 $2,976AT GRAD PLUS $2,976 ÷ $57,125 = 0.05209I $8,000O $6,500 or 5.209%N $5,000
STAFFORDSTAFFORD PERKI NS
2.875% 8.500% 6.800% 6.540% 5.000%
Note: Special rules apply to consolidation loans that includeHEAL loans
• 2006 / 2007 Borrower Loan Portfolio– May contain any or all of the following:
• Consolidation loan with a fixed rate• Perkins Loan with a fixed rate• Stafford loan with variable rate• Stafford loan with a fixed rate• PLUS loan with variable rate• PLUS loan with a fixed rate
• The decision to consolidate is no longer solely interest rate driven. Focus shifts to Debt Management– In a fixed rate environment borrowers need to consider:
• Timing and benefits• Longer repayment terms• Smaller monthly payments• Assistance with loan portfolio management
• Federal Loan Consolidation is no longer a “one size fits all” solution– When is consolidation a good consideration?
• When lower monthly payments allow borrower to focus on repaying higher interest rate debts
• When long term payment relief is necessary• When interest rates are low and can be locked in• When solid borrower benefits make a difference• When loan forgiveness is not an option
• Consolidation environment in the industry has fundamentally changed– Loan interest rate environment spurred demand for
consolidation; new entrants– Elimination of single holder rule means competition will
continue to increase, new entrants will likely stay
• Marketing activities are getting more aggressive and, in some cases, reckless– Bypassing the financial aid office– Pushing consolidation in all cases– Recruiting students to market– Offering direct financial incentives to prospective applicants– Exploiting state “open records” laws
• Increased competition from existing student loan industry lenders and from new entrants– Lenders, marketers, brokers, eligible lender trusts
• Will need to reexamine the ability to provide front end benefits if the loans are consolidated away as soon an the borrower enters repayment – or while still in school; Grad PLUS or deferred loans
• Activities of marketers / brokers may place guarantee at risk if the activities violate regulations/laws
• Based on what we have learned and shared today concerning the current and changing loan consolidation environment, what should we do?– As schools– As lenders– As guarantors– As borrowers– As an industry
• Know The Facts About Consolidation… AND share them with your staff and students:– Emails– Entrance & Exit Counseling– Letters– Consolidation Seminars for Students
• Proactively addressing this important issue will serve your student and parent borrowers well and prevent problems for your office!
• As long-time participants and service providers in the student loan industry, we have a responsibility to work with other industry leaders to address these issues
• Providing educational services, materials and resources to help borrowers successfully manage their education related debt is critical
• Consider adding consolidation related information to your financial aid office web-site
• Consider consolidation specific e-mail communications to your student and parent borrowers