Student Loan Consolidation Hot Topics

Due to recent legislative changes, certain federal student loan consolidation borrower benefits will no longer be offered after October 1, 2007 for any new consolidation loans taken out. These benefits include offers such as interest rate reductions for on-time payments and automatic checking account withdrawal. The changes will not affect any federal consolidation loan that has been completed prior to October 1, 2007. The legislative changes are part of a bill titled “The College Cost Reduction and Access Act (H.R. 2669).”

H.R. 2669 contains provisions aimed to increase Pell grants through 2017, gradually cut federal student loan interest rates in half over the next 5 years, and institute several cuts to lenders and guarantors. Other provisions include Title IV loan forgiveness changes, increases for income protection allowances, and Title VIII Partnership Grants.

Borrower benefits will no longer be available due to the lender and guarantor cuts:

• Elimination of “Exceptional Performer” status which allowed lenders to receive higher insurance rates on defaulted loans
• A reduction in the insurance paid by the federal government for defaulted loans from 98% to 97%
• Reduced amount guarantors may keep when collecting on defaulted loans
• Reduced special allowance payments to lenders
• Increased loan fee lenders must pay to the Department of Education(DOE)
• Decreased account maintenance fees paid by the DOE to guarantors

A full summary of all the provisions contained on H.R. 2669 can be reviewed by visiting:
http://www.nasfaa.org/publications/2007/G2669Summary091007.html

In a nutshell, the above listed cuts will shrink lender profit margins for federal consolidation loans. With the decreased margins, lenders will no longer be able to afford offering borrower benefits. If lenders were to continue offering borrower benefits and discounts after the changes take effect, they would have to take a loss on each funded consolidation loan.

A lot more to come - stay tuned.