Student Loan Consolidation Rates Set to Increase on July 1
Congress voted on and passed Feb. 1 the Deficit Reduction Act
of 2005 that included massive cuts to federal student loan
programs. The $11.9 billion in student loan cuts, including
changes in laws regarding student loan consolidation, will
negatively impact those students seeking a college education and
others seeking to consolidate their higher interest loans. The
industry expects a rush of students seeking to consolidate at
the current low rates that are set to increase on July 1.
The Deficit Reduction Act of 2005, S. 1932, was narrowly
approved Feb. 1 by the House of Representatives. Passing by a
two-vote margin of 216-214, S. 1932 was signed into public law
Feb. 8 by President Bush, thereby approving the $11.9 billion in
student loan cuts over the next five years.
Students and graduates now are in jeopardy. With college costs
increasing every year and the forthcoming higher interest rates
on student loan consolidation, college students are rushing to
consolidate before the July 1 rate increase.
Student Loans Take the Hardest Hit
The cuts to federal student loans are the worst among cuts to
other federal programs including Medicaid, Medicare and food
stamps.
A majority of the legislation's provisions to student loans will
take effect on July 1 and others will be implemented over time.
Some provisions include an increase to 6.8 percent for federal
Stafford Loans, from rates as low as 4.7 percent. PLUS fixed
interest rates will jump to 8.5 percent, from 7.9 percent. The
legislation leaves consolidation loans current fixed rate in
place.
Consolidate Student Loans Before July 1 Rate Increase
With student loan consolidation rates set to skyrocket on July
1, now is the time for students and graduates to consolidate,
according to NextStudent, the Phoenix-based education funding
company. Students and graduates now are urged to consolidate as
current consolidation rates can be as low as 2.75 percent with
benefits applied. Other incentives to consolidate include a
longer payment term, one monthly payment and no prepayment
penalties.
The following are other provisions affecting student loan
consolidation that take effect July 1, 2006. Students and
graduates should be aware of the new regulations so that they
now can take action:
Consolidation Loan Changes - Single holder rule is not changed -
Eliminates in-school and spousal consolidation options. - A
subsequent consolidation loan may be made in the DL Program only
if the FFELP borrower wishes to obtain an income contingent
repayment plan and, the borrower is trying to avoid default, but
that is conditioned by the requirement that such a loan has been
submitted to a guaranty agency for what used to be called
"preclaims assistance" but is now labeled as "default aversion."
- Also, in the Conf. Rpt. is a provision providing that only if
a FFELP borrower has an application for a consolidation loan
rejected by a lender or the application is rejected because the
borrower wanted income-sensitive repayment terms, then the
borrower can receive a direct consolidation loan. - A borrower
with a defaulted loan can receive a DL consolidation loan to
resolve the default. - Unless otherwise specified the terms of
DL consolidation loans are the same as FFELP consolidation loans.
Approval of the Deficit Reduction Act brings major cuts to
student loans and a change in regulations regarding student loan
consolidation. Although the legislation has changed to the
detriment of those seeking a higher education, students and
graduates still have the option to consolidate before the
interest rate is set to increase on July 1.