Consolidated student loan
The federal government has made consolidation loans available to help borrowers cope with large amounts of federal student loan debt. Consolidation loans are designed to help borrowers stay current on loan payments, thereby reducing the government?s costs of paying for defaults. Instead of making concurrent repayments on several loans over a period usually limited to 10 years, consolidation loan borrowers can combine their loans and extend their repayment periods beyond 10 years, consolidation loan borrowers can combine their loans and extend their payment periods beyond 10 years, thereby reducing monthly repayments. Consolidation loans also allow borrowers to lock in a fixed interest rate that varies from year to year. .
BACKGROUND: .
Congress created consolidation loans under Title IV of the Higher Education Act to help borrowers combine and reduce monthly repayments so as to help decrease federal loan default costs. Consolidation loans are available under Education?s two major student loan programs, the Federal Family Education Loan Program (FFELP) and Ford Direct Loan Program (FDLP). Under FFELP, private lenders make loans to students with Education guaranteeing the lenders loan repayment and a rate of return on the loans they make. Under FDLP, the federal government makes loans to students using federal funds.
The increase in consolidation borrowers and loans has raised congressional interest in the cost of the program for the federal government. Two main types of federal costs are involved. One is SUBSIDY- the net present value of cash flows to and from the government that result from providing these loans to borrowers. The second type of cost is administration, which includes such items as expenses related to originating and servicing direct loans. For years consolidation loans were basically the only alternative available to borrowers seeking to reduce the size of their loan repayments. In recent years, however, some repayment options, such as graduated, extended, and income-based repayment plans, have been added to the FFELP and FDLP. This change has raised congressional interest in the degree to which these options extend payment relief to borrowers without requiring them to consolidate their loans, and in the potential advantages and disadvantages of the various approaches, both for borrowers and the federal government.
SEVERAL TYPES OF LOANS: .
In addition to consolidation loans, a number of other types of loans are available under FFELP and FDLP, including subsidized Stafford, unsubsidized Stafford, and PLUS loans. Both subsidized and unsubsidized Stafford loans are variable rate loans that are available to undergraduate and graduate students. The interest rates borrowers pay on these loans adjusts annually, based on a statutorily established market-indexed rate setting formula, and may not exceed 8.25%. To qualify for a subsidized Stafford loan, a student must establish financial need. Students can qualify for unsubsidized Stafford loans regardless of financial need. The federal government pays the interest on behalf of subsidized loan borrowers which the student is in school. Unsubsidized loan borrowers are responsible for all interest costs. PLUS loans are variable rate loans that are available to parents of dependent undergraduate students. The interest rates on these loans adjust annually, based on a statutorily established market-indexed rate setting formula, and may not exceed 9%. Parents can qualify for PLUS loan regardless of financial need.
Consolidation loans differ from Stafford and PLUS loans in that they enable borrowers who have multiple loans-possibly from different lenders, different guarantors, and even from different loan programs to combine their loans into a single loan and make one monthly payment. Consolidation loans are new originations that, in general, do no contribute to increases in outstanding loan balances because they refinance already existing loans. But obtaining a consolidation loan, borrowers can lower their monthly payments by extending the repayment period longer than the maximum 10 years generally available on Stafford and PLUS loans. Consolidation loans also provide borrowers with the opportunity to lock in a fixed interest rate on their student loans, based on the weighted average of the interest rates in effect on the loans being consolidated rounded up to the nearest one eighth of 1percent, capped at 8.25 percent. Borrowers can qualify for consolidation loans regardless of financial need.
Loans eligible for inclusion in a consolidation loan must be comprised of at least one eligible FFELP or FDLP loan. Other types of federal student loans made outside of FFELP and FDLP, which may carry a variable or fixed borrower interest rate, are also eligible for inclusion in a consolidation loan, including Perkins loans, Health Professions Student loans, Nursing Student Loans, and Health Education Assistance Loans (HEAL).
CONSOliDATION AND NON-CONSOliDATION BORROWERS: .
Consolidation loan borrowers differed from non consolidation loan borrowers in a variety of ways. On average, consolidation loan borrowers had higher student loan debt, higher incomes, larger annual loan repayments, and longer repayment periods. They were also less likely to have attended a proprietary school and were more likely to have borrowed while attending graduate professional school. In addition, they averaged more student loans from more lenders. Overall, consolidation loan borrowers defaulted less often than borrowers who had not consolidated their loans. .
Borrowers with consolidation loans had a higher average amount of student loan debt than non consolidation loan borrowers. Borrowers with consolidation loans had higher average incomes and higher average annual repayments on their student loans than non consolidation loan borrowers. In addition, loan repayments comprised a slightly higher percentage of the incomes of consolidation borrowers, with an annual student loan repayment-to-income ratio for consolidation loan borrowers for non-consolidation borrowers. Although both consolidation and non consolidation loan borrowers tended to borrow prior to graduate professional school, analysis indicates that consolidation loan borrowers were more likely than non consolidation borrowers to have taken out a student loan while attending graduate/professional school. Prior to consolidating their loans, consolidation loan borrowers averaged more loans from more lenders than non consolidation loan borrowers. Consolidation loan borrowers had taken out an average of about six loans each, nearly twice the average number for non consolidation borrowers. Furthermore, consolidation loan borrowers were more likely to have borrowed from more than one lender. Prior to consolidation, 25percent of consolidation loan borrowers had loans from three or more lenders compared with 9 percent for non consolidation borrowers.
INTEREST RATES: .
In most instances, consolidated loans allow harried borrowers who have fallen behind paying back their student loans to reorganize their loans into one package. Interest rates on consolidated student loans are fixed, meaning they cannot and will not change. The rate specified on the day consolidate loan taken is the rate we pay off the consolidation loan. To make things even sweeter, Congress made sure that the fixed interest rate on student loan consolidations could never exceed 8.25 percent. Most traditional student loans are offered with varying interest rates. These rates are tied to U.S. Treasury bill rates. .
CONCLUSION: .
Although additional options to consolidation are available that gives some FFELP and FDLP borrowers? opportunities to simplify loan repayment and reduce repayments to more manageable levels, not all borrowers qualify. While consolidation loans may thus remain an important tool to help borrowers manage their educational debt and thus reduce the cost of student loan defaults, the surge in the number of borrowers consolidating their loans suggest that many borrowers who face little risk of default are choosing consolidation as a way of obtaining low fixed interest rates, an economically rational choice on the part of borrowers.
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