Possible Student Loan Tactic

If you have private student loans that are relatively high interest and cannot consolidate, you might look into this and try it out.

Enroll for one class at an approved university and get a "federal student loan"
After you complete the course, etc. By having that federal loan, you can then qualify to have ALL your student loans consolidated in too a federal program, (or so I am told).

I'm a Financial Aid Officer. This suggestion comes up a lot. Unfortunately, it doesn't work. The idea arises due to the confusing nature of the private banks' involvement in student lending. There are four types of student loans (Federal Stafford, Federal consolidation, private “alternative loans”, and private consolidation) and two types of lenders (Federal Direct and private banks). Borrowing from Federal Direct means that you’re borrowing directly from the federal government, and it’s always a federal loan. Borrowing a student loan from a private bank may or may not be a federal loan, or you could have both federal and private loans from the same bank, or different banks. You might also have a federal consolidation loan and a private consolidation loan from the same or different banks. Confused yet?

Federal Stafford Loans:
Students can borrow Federal Stafford loans either directly from the government (Federal Direct Loans) or from a private bank under the FFELP program (Federal Family Education Loan Program). Either way, the loan is still a Stafford loan, with exactly the same terms, limits, rights, responsibilities, and consequences of default. The difference is where the money is coming from. Because Stafford loans are Federal loans, the government would make all the loans themselves, but in order to expand the pool of available funds for student lending it created the FFELP program so that private banks could make these Federal loans, too. In fact, since 1965, private banks have provided the majority of funds for education loans.

[Side note: this has become an issue this year with the credit crunch. Lenders have been dropping out like flies and refusing to accept loan renewals on serial MPN's (master promissory notes) that are supposed to be good for 10 years. The government quickly stepped in and passed the Ensuring Continued Access to Student Loans Act of 2008 whereby, among a few other things, it set up provisions to buy up existing FFELP student loans in order to free up funding for new loans (sounds a bit like a certain other bailout, doesn't it?)]

Private Student Loans:
Most banks that participate in the FFELP program have also created their own private student loans, also known as “alternative loans”. This business has boomed in recent years because of the stagnant limits on Stafford loans vs. exponentially-increasing college costs. Consider this: in 1992, annual (academic year) Stafford loan limits for an independent freshman undergrad were increased to $2,625 for Subsidized and $4,000 for Unsubsidized Stafford (though, no Unsub for a dependent student without a PLUS loan denial). The limits stayed right there until 2007, when just the Sub was raised to a whopping $3,500. Unsub stayed the same. In contrast, the college that I attended more than doubled its tuition in that time, from just over $11,000 to more than $23,000. (All I can say is that I'm glad I was there in the early 90’s). The ECASLA of 2008 raised the Unsub limit by another $2,000; great, but still not enough.

I digress...
Sallie Mae is a perfect example of a lender/servicer that has both a FFELP arm and a private loan arm. Neither arm has anything to do with what the other arm is doing, but students often don’t distinguish between them.

Because private alternative education loans are created by the banks themselves, they are limited only by what the market will accept as far as terms & interest rates (usually variable!). Of course, they use credit reports to determine, case-by-case, what terms they will offer. Take it or leave it. Because students are often desperate for the cash, unfortunately, they will often take it, despite my best efforts to counsel them otherwise.

In contrast, private lenders making Federal Stafford loans under the FFELP program must use the terms set by the government. No credit report required. They must give you the interest rate the government sets. You must get a six-month grace period. They must offer full in-school deferment if you’re attending at least half-time. They must allow you the choice of standard, extended, graduated, or income-contingent payment plans. They must allow you to request forbearance in times of hardship. Et cetera. In return, the lenders’ risk is mitigated by the loans being guaranteed.

Federal Consolidation Loans & private consolidation loans:
Both Federal Direct and private banks offer federal consolidation loans. Many private banks also offer private (credit-based) consolidation loans, but don’t confuse these with the federal loans! A student with only FFELP (private bank) Stafford loans cannot request a Federal Direct consolidation loan. If that same student borrows a new Stafford loan from Federal Direct, he then becomes eligible to consolidate ALL of his Stafford loans with Federal Direct. This is where the idea in your post arose. The key is that the loans must be federal (i.e. Stafford) in order to federally consolidate them, no matter who is doing the lending.

A student with a mix of alternative loans and federal loans could, of course, apply for one private consolidation loan (different from a federal consolidation loan from even the same private lender), but this loan would be credit-based and probably wouldn’t have the same favorable terms as a federal consolidation loan. This student could include his Stafford loans into this private consolidation loan, but not vice-versa (and I do not recommend it!)

A little story:

Ima Student is about to graduate from Dimple U. So far, she has borrowed $45,000 in FFELP Stafford loans. Ima transferred to DU from another school, and because she forgot to stick with the same lender, she completed a new Stafford MPN with a new lender at Dimple. Now, her Stafford loans are split between AoB and Swindle Bank. With graduation coming up soon, she’s already thinking about consolidating her loans so she only has to deal with one bank. Besides, when Dimple decided to raise tuition by $2000 this year and her laptop fried all at once, she needed to borrow an additional alternative loan. She didn’t have time to shop around, so she applied with Swindle, who offered her a variable-rate loan starting at 12.9%, and no deferment or grace period. AoB was “just OK” and she’s REALLY not happy with Swindle, so Ima would like to keep things simple and consolidate her loans under Federal Direct. She stops in to talk to her friendly FA Officer, who (after reminding her to wait until after her 6-month grace period to consolidate, lest she lose it) tells her the news: since all of her Stafford loans are made by private banks under the FFELP program, she can’t consolidate with Federal Direct. However, she CAN work with a FFELP lender and still get a federal consolidation loan, and it doesn’t have to be AoB or Swindle! The bad news: “I’m terribly sorry, Ima, you can’t roll your Swindle alternative loan in with your Stafford loans”.

In the next few weeks, Ima starts thinking about turning her minor into a second major, which would require two more terms of study. She goes back to the FA office to discuss her options. As luck would have it, Swindle Bank is having some trouble and has decided to drop out of the FFELP program. “I remember our last conversation”, says the FA Officer, “you might consider completing a new MPN with Federal Direct to renew your Stafford loans as you finish up your second major. Then you could consolidate with them later, though you still wouldn’t be able to roll in your Swindle alternative loan”.

9 months later, Ima stops into FA again to complete her exit counseling. The conversation turns back to consolidation. The FA Officer pulls up the NSLDS (National Student Loan Data System) to see all of Ima’s federal loans. “Well, I see three lenders here, you’ve got Federal Direct and Swindle, of course, then there are two loans from AoB at your prior school. After your grace period you can consolidate all of these under Federal Direct, like we discussed.”
“One, two, three… wait… where’s that other loan I got from Swindle?”
“The NSLDS is a government site that only tracks federal student loans. Your Federal Stafford loans from Swindle show up here, but your alternative loan from them is a private, credit-based loan. It shows up on your credit report, but it isn’t tracked here. Do you remember filling out a separate application?”
“Yeah, when I went to their web site to check on my school loans it had a link that said, ‘Need more money for school? Click here.’ Well, of course we all need more money for school, and it just seemed like another form to fill out…”

I don’t know if Ima’s little story makes this any clearer, but it was fun for me, anyway.

The simple litmus test of whether you can federally consolidate your loan is: does it show up on the NSLDS? If it does (there are exceptions), you probably can. You can get to the student access portal of the NSLDS at http://www.nslds.ed.gov/nslds_SA/
Log in with your Federal Student Aid PIN number (same number used to e-sign your online FAFSA). Don’t know or forgot your PIN? Go to the FSA PIN site at: http://www.pin.ed.gov/PINWebApp/pinindex.jsp

These sites are government sites and access is FREE, just like the FAFSA.

Sorry it’s so long!

All of the above is not even including Federal Perkins loans or PLUS loans! I don't want to keep y'all here all day :blink:

Good Lord.. that's long. I did the same thing consolidated 30k of sub and unsub student loans to a lower rate and also to make it easier to manage.

This is an EXCELLENT post and should be a STICKY for Student Loans