… because as of next Friday, you’ll be up a creek without one if you have a two step consolidation. The previous blog post turned out to be a pipe dream. Very sad.
Moral of the story:
Consolidate now. If you have an application from us, return it now.
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This whole two step thing could possibly be in limbo. We’re checking with authorities and sources now - so stay tuned carefully. Obviously, continue to send in your completed student loan consolidation applications as quiuckly as possible, doubly so if they’re “two step” consolidations, but there may be a way we can salvage the situation. Possibly. I won’t even lay down betting odds yet, but it’s better than zero chance.
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After a few frantic days trying to decode the mystery of the Department of Education’s Dear Colleague Letter (which in the financial aid industry is more or less an amendment to existing regulations), we’ve got some answers regarding two step consolidation. The very short version:
Consolidate your student loans before March 30, 2006 or else.
The details: there are fundamentally two kinds of federal student loans. The first are Direct loans, which are managed by the Department of Education. The second are FFELP loans, which stands for Family Federal Education Loan Program. These are federal student loans managed by private corporations, agencies, and non-profits. The Student Loan Network, for example, participates in the FFELP program.
The strictest interpretation of the Higher Education Act says that you may consolidate your student loans only with your existing lender, unless you have FFELP loans from two or more different lenders, or you only have Direct loans. If you only have student loans with one FFELP lender, then for the most part you could only consolidate your loans with that lender, which meant if they had bad customer service or bad benefits or even just a silly name, you couldn’t consolidate your loans anywhere else. This is what is referred to when people talk about the “Single Lender Rule” or the “Single Lender Law”.
Until last Friday (March 17, 2006), there was a way to consolidate your loans, even if they met the conditions of the Single Lender Rule, called the two step consolidation process. In a two step, if you had a Direct or Perkins loan and a single FFELP lender, your Direct or Perkins loan would be consolidated first, effectively transforming your loan portfolio into one with two FFELP lenders. This allowed students who were otherwise locked into a single lender to have a dizzying array of choices when it came to consolidation. Unfortunately, as of last Friday, the Department of Education said that as of March 31, 2006, it will no longer allow these loans.
Actually, technically they said that the loans would not be eligible for re-insurance, which means that no bank would touch them - they’d be unsecured loans and if the borrower defaulted on them, the Department of Education wouldn’t foot the bill, which is why banks currently fund federal student loans. Taxpayers foot the bill if students don’t pay - that’s the loan insurance that makes federal student loans so appealing to banks. The bank will never be left holding the bag.
So to make a very long blog post… uh, long, two step consolidations are coming to an end as of March 31, 2006. If you’re not sure you fit the two step profile, or you just want to consolidate, I can’t urge you strongly enough to file an application for consolidation today - and opt for the eSignature option. Apply now - it’s free, and there’s no obligation on your part if you change your mind prior to signing the application, but sooner is vastly better than later with these regulatory changes.
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A lot of companies - including the Student Loan Network - use the terms consolidation and refinancing interchangeably, and for good reason - in terms of financial instruments, mortgage refinancing is the closest analogy to student loan consolidation. There are some key differences, though.
Difference #1: Revolving door?
Mortgages can be refinanced many times - as many times as you want, actually. With student loan consolidation, without going through a giant bureaucratic maze, most borrowers consolidate just once, or maybe twice.
Difference #2: Show me the money!
Mortgages have lots of things tied to them - equity, credit checks, property, collateral, fees (and fees, and fees, and fees), closing costs, early payment penalties, etc. With student loan consolidation, there are no credit checks, no fees, no collateral, no cosigners, and no repayment penalties.
Difference #3: No balloons
Each time you refinance a mortgage, you have the option of adding to the loan, taking out more money. With student loan consolidation, you can only get a consolidation loan for the exact balance of your existing student loans. You can’t borrow a penny more.
Difference #4: Rate my rates
Mortgages can have wildly varying rates - in fact, depending on market conditions, you could apply for a mortgage today and get a different quote with a different rate tomorrow. Student loan consolidation uses a fixed formula determined by Congress, adjusted every July 1. The only place lenders can vary is on the borrower benefits, or discounts. By law, all federal student loan consolidation companies must offer the same rates.
We just put together a new email promo to let people know about consolidation. Check it out, and comment with your thoughts and opinions!
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