As the six month grace period on most student loans comes to an end, recent and future college graduates may find themselves in a financial bind. A sizable percentage of college graduates will require assistance in order to pay down their debt. Yet, many of the top corporations responsible for financing supplementary education have decided that loan consolidation is a risky business. Loan consolidation has always been fairly unremunerative for creditors, and economic decline further isolates lenders from this practice.
Sallie Mae Discontinues Consolidation
Despite its status as the country’s leading student loan lender and a reputation for offering low-cost credit financing, the Sallie Mae corporation’s announcement in early 2008 that they would no longer offer student loan consolidation or waive the origination fees on Federal Stafford Loans was not unexpected. In general, the nation’s economic situation has made credit less available due to creditors’ reluctance to invest in the growing numbers of potentially high-risk borrowers.
However, the recent actions of Sallie Mae and the majority of Federal Family Education Loan Program (FFELP) lenders were directly in response to legislative rulings affecting the cost of buying and selling consolidation loans. The 2007 College Cost Reduction and Access Act established a lower, fixed rate on all federal student loans for undergraduates and instituted a timetable by which the rates would continue to decrease annually. The law now also requires that lenders payer higher loan fees, while reducing the funds owed to creditors from defaulted loans, special allowance payments, and other bonuses.
Loan Companies Reject Financial Restrictions
Congress’s latest measures are intended to make a college education an affordable option, especially for middle class families who qualify for less financial aid. For example, the new statutes prohibit credit lenders from displacing these higher fees onto borrowers in order to keep overall costs down. The unfortunate consequence of well-meaning legislation is that education loan lenders have opted out of offering student loan consolidation at all, whether federal or private. By definition, interest rates on consolidation loans are often significantly lower than other types of loans, and further government issued reductions over the last five years have made them wholly unprofitable to lenders.
Consolidating Private Student Loans
Graduates looking to consolidate federal student loans can still apply with the Department of Education, but finding a way to manage private loans will be more difficult. Currently, the Department of Education and many free online consultation sites are recommending Wells Fargo for borrowers with a student loan debt of at least $5000. Yet, for former Sallie Mae customers the switch could mean increasing their debts, and for some borrowers, the chances of being granted the loan are slim.
Private loan consolidation is credit-based and typically requires a minimum income for applicants without a co-signer. At a time when many families are suffering from other types of credit debt, they face the possibility of being subjected to higher rates than they would have received from Sallie Mae, along with the unexpected inconvenience of consolidating their federal and private loans through multiple companies. College graduates who haven’t found employment and don’t have an eligible co-signer have even fewer options for repaying their debt, and unlike federal loans most private loans cannot be deferred.
Managing Student Loan Debt
Although the consolidation program is no longer available from the top loan companies, eligible borrowers can still apply for lower payments or delay repayment temporarily through forbearance. However, both of these options draw out the loan term and allow interest to continue building, increasing the total cost of the loan.
Meanwhile, incoming students have a smaller pool of lenders available to them and much higher interest rates. A college education is becoming less attainable to middle class and low income families, and lenders like Sallie Mae no longer offer the discounts that made them forerunners in the industry. Between the loan companies’ interest in making money and the government’s awkward handling of the credit crisis, students are losing out instead of receiving adequate financing to pursue careers and bolster the deteriorating economy.
Sources
"Summary of the College Cost Reduction and Access Act." 2007. National Association of Student Financial Aid Administrators. 1 Dec 2009 <http://www.nasfaa.org/publications/2007/G2669Summary091007.html>.
Andriotis, Anna Maria. "Sallie Mae Halts Student-Loan Consolidation." 2008. SmartMoney.com. 28 Nov 2009 <http://www.smartmoney.com/spending/deals/sallie-mae-halts-student-loan-consolidation-22885/>.
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