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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LOAN CONSOLIDATION . . . . . . why won’t it just go away?
MASFAP Spring Conference 2007 March 7 – 9, 2007. LOAN CONSOLIDATION . . . . . . why won’t it just go away?. Chris Simmerman - Vice President, Campus Programs, Sallie Mae Greg Diamond – Manager, Loan Consolidation, MOHELA. Agenda. Welcome Consolidation – Past and Present - PowerPoint PPT Presentation
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This Past Consolidation Season• 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
– Consolidation loans have a fixed interest rate for the life of the loan
– To determine the fixed rate, a weighted-average is computed based on current interest rates of underlying loans
• Calculated rate is rounded up to the nearest 1/8th percent– The interest rate is capped at 8.25%– Special rules apply to the portion of a FFEL consolidation
– 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
STAFFORD STAFFORD PERKINS
2.875% 8.500% 6.800% 6.540% 5.000%
Note: Special rules apply to consolidation loans that includeHEAL loans
– 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
– Includes Grad PLUS• Private loan with variable rate
Consolidation Considerations• 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
Loan Consolidation Landscape• 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
What This Means for Schools• Increased marketing activities on campus and
directly to students• More lenders / brokers / consolidators working with
students while they are enrolled in school• Possibility that current lenders / guarantors will not
be able to provide same level of service / benefits• Cohort default rate could be negatively impacted • Student and parent borrowers more confused about
What This Means for Lenders• 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
What We Should Do• 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