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© 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
© 2007 Sallie Mae, Inc. All Rights Reserved Agenda Welcome Consolidation – Past and Present Assessing the Value of Loan Consolidation Consolidation - Future Questions & Answers
© 2007 Sallie Mae, Inc. All Rights Reserved Consolidation – Past and Present HERA and ESAA impact
© 2007 Sallie Mae, Inc. All Rights Reserved 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 more education
© 2007 Sallie Mae, Inc. All Rights Reserved Consolidation Changes 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) –Elimination of Single Holder rule (effective June 15, 2006)
© 2007 Sallie Mae, Inc. All Rights Reserved Consolidation Changes Effective July 2006, the following change indirectly affected Federal Student Loan Consolidation: –Fixed interest rates for Stafford and PLUS loans Stafford loans have a fixed rate of 6.8% FFEL PLUS loans, including Grad PLUS, have a fixed rate of 8.5% DL PLUS loans have a fixed rate of 7.9% –Consolidation interest rate cap of 8.25% may be advantageous for PLUS borrowers
© 2007 Sallie Mae, Inc. All Rights Reserved What did NOT Change Consolidation interest rate –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 loan comprised of HEAL loans
© 2007 Sallie Mae, Inc. All Rights Reserved Consolidation Interest Rate Consolidation interest rate –Fixed weighted average of the loans consolidated, rounded up to the nearest 1/8 th percent, with a maximum rate of 8.25%
© 2007 Sallie Mae, Inc. All Rights Reserved Loan Portfolio Considerations 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 –Includes Grad PLUS Private loan with variable rate
© 2007 Sallie Mae, Inc. All Rights Reserved Grad PLUS Same program as the PLUS loan, but available to graduate and professional students Fixed interest rate of 8.5% –Consolidation interest rate cap of 8.25% Consolidation available after full disbursement of loan – even if student still enrolled Deferment available while student is enrolled in school
© 2007 Sallie Mae, Inc. All Rights Reserved Timing Considerations Timing –June 30th may no longer be a critical deadline For borrowers with fixed rate loans For borrowers who already consolidated –June 30th, 2007, is important for those graduating who still have variable rate Stafford and PLUS loans Can consider locking in at today’s rate or allowing the loans to remain variable Wait to see the new 2007-08 Stafford and PLUS variable rates published in early June
© 2007 Sallie Mae, Inc. All Rights Reserved Grace Period Considerations Grace Period –2007 graduates may have grace period considerations Those who consolidated through early repayment consolidation forfeited their grace period on consolidated loans –Repayment begins immediately after separation Those who borrowed in AY 2006-2007 may have at least one Stafford loan with a grace period –Borrowers need to be aware of their loan portfolio and be prepared to manage loans entering or re-entering repayment at different times
© 2007 Sallie Mae, Inc. All Rights Reserved Benefits Considerations Borrower Benefits –Borrowers who previously consolidated typically forfeited any underlying Stafford benefits New consolidation benefits may apply –2007 graduates with Stafford loans Need to determine the “cash value” of the benefits on those loans before deciding to consolidate Evaluate whether to earn a benefit, such as a principal credit / rebate, before consolidating –Have the lender define the “cash value” of the benefit being offered
© 2007 Sallie Mae, Inc. All Rights Reserved Assessing the Value of Consolidation Is consolidation still a viable repayment option?
© 2007 Sallie Mae, Inc. All Rights Reserved Debt Management Considerations 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
© 2007 Sallie Mae, Inc. All Rights Reserved Debt Management Considerations Financial advisors typically recommend that student loan debt payments be less than 8% - 10% monthly gross income Annual Income Monthly Income Maximum Student Loan Payment At: 8%10%15% $30,000$2,500$200$250$375 $50,000$4,167$333$417$625 $75,000$6,250$500$625$938 $100,000$8,333$667$833$1,250 CAUTIONALERTWARNING
© 2007 Sallie Mae, Inc. All Rights Reserved 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
© 2007 Sallie Mae, Inc. All Rights Reserved Consolidation Considerations As the marketing to borrowers intensifies, many will seek guidance from the FAO –Borrowers should consider that: Repayment can be a long-term relationship Many, if not most, borrowers cannot reconsolidate under current rules Many consolidation marketers are not the lenders Ask who the lender / loan holder and loan servicer will actually be and whether this can change Borrower benefits may look too good to be true and require reading the fine print
© 2007 Sallie Mae, Inc. All Rights Reserved Assessing the Value Payment amount comparison –Consider what the borrower can reasonably afford to pay Interest cost comparison –Determine the overall cost the borrower is willing to incur Significance of borrower benefits –Borrowers may delay consolidation to take advantage of underlying loan benefits –By consolidating later in the loan life-cycle, borrowers could reap rewards twice!
© 2007 Sallie Mae, Inc. All Rights Reserved Consolidation - Future Is the consolidation hype really over?
© 2007 Sallie Mae, Inc. All Rights Reserved 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
© 2007 Sallie Mae, Inc. All Rights Reserved 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 to do
© 2007 Sallie Mae, Inc. All Rights Reserved What This Means for Guarantors Uncertainty concerning repayment base; possible impact on cohort default rate May impact ability to provide additional services to borrowers Focus may shift from being the guarantor at origination to being the guarantor at consolidation Many guarantors are relaxing their consolidation waivers in order to pick up additional loan volume to stabilize their portfolios
© 2007 Sallie Mae, Inc. All Rights Reserved 10 Fastest Growing Consolidation Guarantors* Percentage Growth Rate FY ’04-05 vs. FY ’05-06 RankGuarantor% Growth 1.Georgia (GSFC)1,150 % 2.California (CSAC / EdFund)313 % 3.North Carolina (MCSEAA)128 % 4.Vermont (VSAC)106 % 5.Iowa (ICSAC)95 % 6.Wisconsin (Great Lakes)88 % 7.New Mexico (NMEAF)86 % 8.Pennsylvania (PHEAA/AES)81 % 9.Massachusetts (ASA)75 % 10.ECMC (Virginia / Oregon)51 % USA Funds (USAF)36 % Missouri (MDHE)33 % *Based upon fist 9 months of NSLDS data through June 2006
© 2007 Sallie Mae, Inc. All Rights Reserved 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
© 2007 Sallie Mae, Inc. All Rights Reserved 10 Fastest Growing Consolidation Lenders* Percentage Growth Rate FY ’04-05 vs. FY ’05-06 RankLender% Growth 1.Graduate Leverage1,202 % 2.NextStudent413 % 3.Academic Loan Group323 % 4.Pacific Loan Processors294 % 5.Indiana Secondary Market253 % 6.Student Loan XPress116 % 7.Iowa Student Loan Liquidity Corp.81 % 8.Access Group79 % 9.Vermont Student Assistance Corp.74 % 10.Bank of America68 % MOHELA63 % Sallie Mae10 % *Based upon NSLDS data as of September 2006
© 2007 Sallie Mae, Inc. All Rights Reserved What This Means for Borrowers Can consolidate with any eligible lender Will be a prime marketing target while in school and when entering repayment Will have a wide variety of choices and will need to carefully consider all options and implications Will look to the financial aid office for answers and for advice May be more confused than ever
© 2007 Sallie Mae, Inc. All Rights Reserved What This Means for the Industry Environment has fundamentally changed Participants will evaluate how to best operate in the new landscape Will need to proactively address these issues –Education and planning are key We can either drive the process or just go along for the ride
© 2007 Sallie Mae, Inc. All Rights Reserved 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
© 2007 Sallie Mae, Inc. All Rights Reserved Resources
© 2007 Sallie Mae, Inc. All Rights Reserved Additional Considerations 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!
© 2007 Sallie Mae, Inc. All Rights Reserved Final Thoughts 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
© 2007 Sallie Mae, Inc. All Rights Reserved Resources Guarantor and lender materials Internet –www.mapping-your-future.orgwww.mapping-your-future.org –www.salliemae.com/consolidationwww.salliemae.com/consolidation –www.mohela.com/consolidationwww.mohela.com/consolidation –www.finaid.orgwww.finaid.org
© 2007 Sallie Mae, Inc. All Rights Reserved
MASFAP – Spring Conference 2006 CAUTION: Merging Loans Ahead – For Consolidation Info, Tune to AM 7562 Chris Simmerman, Sallie Mae Lake Ozark, MO Greg.
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