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Government Announces Brief Opportunity to Consolidate Student Loans

Between January 1 and January 30, 2012, the U.S. Department of Education (department) will offer Special Direct Consolidation Loans, which are designed to help borrowers manage their debt by grouping federal student loans into a single bill with a single payment.
 
This special short-term consolidation opportunity is available to those who have both:

  • One or more Direct Loans or Federal Family Education Loans (FFEL) owned by the department and serviced by one of the department’s servicers
  • One or more commercially-held FFELs owned by an FFEL lender and serviced by one of that lender’s servicers

 
While a borrower must have both a department-owned loan and a commercial-owned loan to qualify for this program, only the commercial-owned loans will be consolidated.
 
The eligible commercially-held FFEL loans include:

  • FFEL Subsidized and Unsubsidized Stafford Loans
  • FFEL Plus Loans
  • FFEL Consolidation Loans

 
The loans must be in grace, repayment, deferment, or forbearance to qualify for the program.
 
The consolidated student loans will receive a 0.25 percent interest rate reduction then take on a fixed rate calculated from the average of all the loans, but cannot exceed 8.25 percent.
 
The repayment term on the consolidated loan will remain the same as the current terms on the borrowers’ existing loans, but since there will be an interest rate reduction, the total interest payment over the life of the loan will be smaller than a traditional consolidation program would allow.
 
If eligible, borrowers can still make use of the income-based repayment (IBR) program with these loans.
 
Finally, by turning commercially-held FFEL loans into Special Direct Consolidation Loans, they become Direct Loans, which allow eligibility for the Public Service Loan Forgiveness Program (PSLF). The PSLF grants full student loan forgiveness after 120 payments from an individual employed in an eligible public service job.


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Government Student Loans Cause Social Security Cuts

The current student debt crisis has been centered on the impact it is having on young college-aged borrowers. But despite this emphasis on youth, America’s younger generations are not the only group affected by private and government student loans.

The baby boomer generation, which is now reaching the age of retirement, has been keenly impacted by this debt crisis, yet is rarely mentioned amongst the onslaught of youth-centric student debt news.

The primary culprit in enabling this student debt crisis to hurt the aging baby boomers is The Debt Collection Improvement Act of 1996. That act gave the government the power to withhold a percentage of social security payments for retirees that defaulted on debt owed to the government, including government student loans.

Unfortunately, a good amount of this population borrowed (and are still paying) government student loans.

According to the New American, the federal government cut the social security checks of over 110,000 retirees between January and August of this year. That is almost a doubling of the social security checks cut in all of 2011.

This influx in reduced social security checks not only signifies a problem with our current federal student loan system, but it’s also thrusting our older population into impoverished income levels.

Social security checks cannot be reduced past $750, but, given the debt situation of many, monthly checks of $750 is likely all they will ever see.

“It’s quite extraordinary because normally social security benefits cannot be touched by creditors. When you think about it, $750 a month is less than the poverty line. It’s not a lot of money for people to have,” said Deanne Loonin, an attorney at the National Consumer Law Center in an ABC News interview.

According to a report from the New York Federal Reserve, more than 17 percent of government student lending borrowers are over the age of 50. Student financing, be it from private or government student loans, is exempt from bankruptcy, even for middle-aged adults.

“This is really the only consumer loan out there that people cannot get rid of,” said Smart Money’s AnnaMaria Andriotis in a New American interview.

Retirees struggle to handle their own student debt which was acquired years if not decades ago during their time in college.

“But in most cases, these loans aren’t even their own loans. And that’s what makes this whole situation really sad,” said Andriotis.

The amount of financing lent to parents for the college education of their offspring has risen by 75 percent since the 2005-06 academic year, as reported by Forbes. On average, parents have roughly $34,000 in college-related debt. That number rises to roughly $50,000 over a standard 10-year repayment period.

Recent studies by the Federal Trade Commission (FTC) have shown that 75% of all defaulting loans with co-signers are ultimately repaid by the co-signer, and not the original borrower.

Co-signers clearly are taking the brunt of payment requirements meaning they have fewer funds for the remainder of each month let alone beyond that. This lack of funds is particularly frightening for those on the verge of retirement.

According to the Employee Benefit Research Institute nearly 45 percent of adults aged 48 to 64 will not have enough savings to pay for basic needs and uninsured medical costs upon entering into retirement thanks to private and government student loan debt.

The recession may hold partial blame but so too does the trend of rising tuition costs. In the last two decades, fees have almost tripled, quickly outpacing wage increases. The massive national student debt buckles at an estimated one trillion dollars, 85 percent of which accounts for government student loans.

Retirees, having contributed to our nation’s success long ago, do not need the burden of government student loans to weigh on them in their golden years. Whether they cosigned financing, or simply carried debt past their middle-aged years, it is clear that the protesting youth across the nation are not the sole victims of the student debt crisis. For many of these elderly borrowers salvation may only come with bankruptcy reform laws. Unfortunately, for all too many of these retirees, legal changes may arrive too late.


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Private Student Loans to be Governed by the Government

The Consumer Financial Protection Bureau (CFPB) made a series of recent announcements hinting that the private student loan market may start to see more government oversight.

According to Bloomberg, the CFPB has likened private student loans to the “subprime” loan of the college financing world.

But not all private student loan borrowers are subprime, nor do they need to be treated as such.

“Certain low-risk borrowers probably don’t need to be paying such high rates and paying those high rates is leading them to delay a lot of economic milestones, which have really large consequences and ripple effects for the entire economy, including the housing market,” said Rohit Chopra, the CFPB’s student loan ombudsman.

Those consequences occur when students who are riddled by tens of thousands of dollars in college-related debt refuse to pursue common “rites of passage,” including moving out of mom and dad’s, getting married and buying homes.

While the $1 trillion in outstanding student loan debt includes federally-backed financing as well, it’s the private sector that’s hitting students with the highest and most volatile interest rates.

“During the financial crisis, we had seen the Fed try and ensure that capital markets were functioning and used certain authorities to make sure that asset-backed securities, whose underlying assets were private student loans, were able to be made,” Chopra told Bloomberg in an interview. “It seems that there are some places where the market is not working. You have a lot of responsible borrowers paying very high interest for several years now, but they’re unable to refinance that debt.”

While regulation of the private student loan industry appears to be imminent, an actual long-term solution has yet to be found.

“We can’t begin to [regulate] this all at the federal level,” said Education Secretary Arne Duncan on the Bloomberg radio program. “We need states to continue to invest, and we saw 40 states cut funding to higher education this past year. You need universities to keep costs down, [to] keep tuition down in tough economic times.”


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Interest Rates Remain Calm Amid A Reopening Government

Home loan interest rates remained calm amid news that the government would re-open and avert a debt ceiling crisis.

Rate reports provided by loans.org show that all three interest rates changed minimally for the week ending Oct. 17, 2013. The 30-year fixed-rate mortgage averaged 4.13 percent, a miniscule increase from 4.11 percent seen last week.

The 15-year FRM did not change and remained at 3.15 percent.

The final interest rate reported, the 5/1 adjustable-rate mortgage, declined this week. It dropped from 2.89 percent to this week’s rate of 2.84 percent.

Despite a fear that the shutdown would have an all-encompassing impact on the mortgage industry, the housing market was not harmed greatly.

One fear for the market was a decline in mortgage loans due to a lack of financial information, such as Social Security verification. But a recent report by the Mortgage Bankers Association (MBA) found that mortgage applications grew for the second consecutive week.

The MBA attributed the growth to an increase in refinancing, but other experts believe that an openness from lenders helped keep the market stable.

Jonathan Hyer, senior managing consultant for American Financing Corporation, said many investors remained lenient and allowed loans to be processed without the normally-required documentation. For example, instead of a confirmation by the Social Security office, many investors accepted new mortgage loans as long as the borrower provided Social Security cards as proof.

Another expert looked past the shutdown’s impact and has instead found a rising trend.

Over the past year, home loan interest rate have increased about 1.5 percent. This change has altered the buyers in the housing market drastically, according to Daren Blomquist, vice president of RealtyTrac.

Research from RealtyTrac shows that as interest rates grew from 2012 to 2013, the rise in cash sales has also increased.

On a national scale, when interest rates were 3.60 percent in August of 2012, cash sales accounted for 30 percent of all home purchases. In August of 2013, when RealtyTrac noticed an average 30-year interest rate of 4.46 percent, cash sales comprised 45 percent of all purchases.

In a year’s time, the frequency of cash sales has increased from about one-in-three to about one-in-two. Investors that have sufficient funds to purchase a property with cash are pricing financed buyers out of the market, Blomquist said.

“There’s a plethora of cash buyers out there interested in buying real estate,” he said. “It has started to make it less affordable for those financed borrowers.”


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