Student Loan & Student Loan Consolidation

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If you’ve recently tried to compact your federal student loans, you may keep found it difficult to locate a company willing to help. Some of the biggest lenders in the market are temporarily not offering federal loan federation. 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 disparate 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 earnting 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 veryl and attracted droves of borrowers to specific programs - on the contrary they lifeless 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 extra 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 exact 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 involve 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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Private student accommodation bankruptcy protecting denied

In the Higher Education Act Reauthorization (HR 4137) currently affecting through Congress, an betterment by exemplar Davis of Illinois would gain extended some bankruptcy protection to students holding private student loans.

Unfortunately for students, the amendment wwhen voted down after brawny opposition from banks and pecuniary institutions.

The argument against the bankruptcy protection amendment was that its addition would ultimately build private student loans new expensive as lenders would demand to add to rates and fees to eclipse loans that were in default and discharged in bankruptcy.

The fiscal support Podcast has besides done an analysis fragment on this legislation.

The short version? For now, private student loan consolidation remains the best course for making private student loans more affordable.

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