Student Loan Consolidation Hot Topics

The final auction of the Treasury Bill has taken place, and the new rates for variable student loans have been determined. Drum roll please…

3.60% - Stafford loans in grace (down from 6.62%)
4.21% - Stafford loans in repayment (down from 7.22%)
5.01% - Parent PLUS loans (down from 8.02%)

What does this mean? If you have federal Stafford or PLUS loans that were disbursed prior to July 1, 2006, your interest rate is going to drop. So if you were thinking about consolidating your student loans, I highly recommend that you wait until after July 1, 2008. You stand to save a lot of money…

Again, these rate decreases will only effect loans that were taken out prior to July 1, 2006. Any Stafford or PLUS loan taken out after July 1, 2006 has a fixed interest rate, and will not be affected.

If you have Sallie Mae federal student loans, you may want to get in contact with Sallie and make sure that they didn’t report your account delinquent to the credit bureaus. Not late on your payment? Neither were the other 10 million borrowers that Sallie erroneously reported as being delinquent. Some borrowers reported that their credit score dropped 100 points. While Sallie maintains that the mistake only affected borrowers who have graduated payment plans, it may be worth getting in touch with them even if you have a different repayment plan.

Good luck - I imagine their phone lines are going to be pretty busy for the next few weeks.

I can see from the comments on the previous post that there remains a lot of confusion about when to consolidate. I will answer the questions to the best of my knowledge.

Given the current run rate of the Treasury bill, it looks as though variable student loan interest rates will most likely be going down significantly on July 1st. The last auction of the T-bill will be on May 31st, when the new rate is set. Is there a chance that the rate could go up? Sure - there is always a chance. But given the current trend, it seems very very unlikely. But don’t worry - since the rate is set on May 31st, you will still have all of June to start your consolidation in the unlikely event that the rate increases.

Anyone that has federal student loans taken out prior to July 1, 2006 and has not yet consolidated these loans will be effected by this rate change. So I advise anyone who is thinking about consolidating now, to wait until May 31st when the new federal rate is set. The new rate information will be posted on this blog, and also on SudentLoanConsolidator.com.

For everyone that has a blend of variable rate federal loans (taken out before July 1, 2006, subject to the decrease) and fixed rate federal loans, you will be able to combine all of these loans together when you consolidate.

I do not advise consolidating federal and private student loans together. Doing so would remove all of the federal benefits, and set all of the loans to a variable rate, which is adjusted quarterly by either the LIBOR or PRIME rate indexes. Because federal loan rates are likely to decrease, consolidating federal loans with private loans would cause a significant rate increase.

In addition, the upcoming rate change WILL NOT affect anyone consolidating their private student loan debt. The rate change being discussed is for federal student loans only. Private student loan rates are based on either the LIBOR or PRIME rate indexes and the borrower and/or co-borrowers credit.

I understand how this process can seem a bit overwhelming. So if anyone has additional questions, please feel free to comment. I will make sure that questions and comments are answered on a more regular basis. Also, stay tuned to for the latest rate information once it becomes available.

If you’ve recently tried to consolidate your federal student loans, you may have found it difficult to locate a company willing to help. Some of the biggest lenders in the market are temporarily not offering federal loan consolidation. So what does that mean for you?

Before we discuss your options, lets first look at why so many lenders have stopped offering consolidation. Two different issues are causing the consolidation pause, legislation and credit markets.

Back on October 1, 2007, legislation was passed which contained provisions aimed to shrink the profit margin lenders were getting on federal consolidation loans. The smaller margin allowed for much less profit with zero room for lenders to offer discounts and borrower benefits. It’s important to understand, prior to the October 1st legislation, lenders were taking portions of their own profits and returning it to their borrowers in the form of rebates, interest rate discounts and cash back. Granted, the borrower benefits were a great marketing tool and attracted droves of borrowers to specific programs - but they still helped the borrower save money. Although these changes had a negative impact on many FFELP lenders, the legislation did contain great provisions that would lower interest rates on federal loans over the next several years.

Next we have the credit market crunch - an indirect result of the sub-prime collapse. In order for a lender to consolidate a borrowers federal student loans, that lender has to pay-off the borrowers previous lenders. This requires that the lender have capital available. Now, there are a number of different ways that a lender can do this, (which we won’t get into during this blog) the most common is securing a line of credit with a bank or outside funding source. The outside funding source provides the line of credit with the notion that the lender will be able to package up a bunch of federal consolidation loans and sell them to other investors (securitization). At which point the lender will replenish their line of credit, and be able to write more consolidation loans. For many lenders out there right now, they are not able to secure a funding source, and therefore not able to write consolidation loans. From an investment standpoint, there is a feeling that federal consolidation loans are no longer valuable. I said feeling, because I don’t believe this to be completely true or do I think it will stay this way for too long.

So, the smaller profit margins, coupled with the shaky credit markets have caused a ‘pause’ in the federal consolidation market. And yes, it is a bit more complicated than what I just described, but you get the basic idea of what’s going on.

Now, you need to consolidate your federal loans, but you have no place to go? The Department of Education is still helping borrowers consolidate their federal loans. However, I would wait until after July 1, 2008. For those of you who still have variable rate Stafford and PLUS loans (taken out prior to July 1, 2006), it looks like your interest rate MAY be going down. Not a definite - just a maybe.

Just to point out, the above changes and the federal consolidation pause have not and will not affect private student loan consolidation.

I will be posting more on this topic in the coming weeks - please send along all your questions and comments.

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An interesting maneuver by Sallie Mae to avoid the “new” preferred lender list. And by new, I mean open list that now allows lenders and student loan providers access to what was previously considered a members only club for years. This article begs for the question, “who really has control over YOUR personal information…?”