Submitted by Anonymous7 (not verified) on June 14, 2008 - 6:56am.
Direct loan consolidation "ramped up" from $7 billion in volume in 2004 to $16 billion in 2005 to $20 billion in 2007. 2007 was only $3 billion volume, so it would appear there would currently be a lot of available capacity. Private lenders have been processing direct loans all along; they are signed as federal contractors. In addition, the FFEL loans DoEd would be "purchasing" under the new law would be a different process, not related to the process of loan consolidation; how would that possibly impact consolidation capacity? While borrowers from schools like Univ. of Michigan are unlikely to default, the subset that consolidates are even less likely to default, perhaps because they are taking an active role in their financial planning. The consolidation discount offered in 2000-01 made money by inducing volume from a higher cost program to a lower cost program. Consolidation loans have always been profitable for direct loan. See as one example, http://www.gao.gov/new.items/d06195.pdf . The exception is the subgroup of consolidations that consist of defaulted FFELP loans. Even there, there is a wrinkle, because CBO assigns the poor performance of the subsequent consolidations to the original FFELP program accounts; CBO interprets the federal credit reform act of 1990 to treat consolidation as a repayment plan option on the original Stafford and PLUS loan, rather than a whole new loan, as OMB does. If you were a credit bureau, would you consider the borrower's debt to be zero just because he consolidated? Of course not. There is a continued debt until the borrower's debt as a whole is paid down. CBO's interpretation makes sense. A common-sense way to solve the 9.5% dilemma a couple years back would have been to consolidate FFELP loans associated with those special allowance rates into DL.
Ramping up?
Direct loan consolidation "ramped up" from $7 billion in volume in 2004 to $16 billion in 2005 to $20 billion in 2007. 2007 was only $3 billion volume, so it would appear there would currently be a lot of available capacity. Private lenders have been processing direct loans all along; they are signed as federal contractors. In addition, the FFEL loans DoEd would be "purchasing" under the new law would be a different process, not related to the process of loan consolidation; how would that possibly impact consolidation capacity? While borrowers from schools like Univ. of Michigan are unlikely to default, the subset that consolidates are even less likely to default, perhaps because they are taking an active role in their financial planning. The consolidation discount offered in 2000-01 made money by inducing volume from a higher cost program to a lower cost program. Consolidation loans have always been profitable for direct loan. See as one example, http://www.gao.gov/new.items/d06195.pdf . The exception is the subgroup of consolidations that consist of defaulted FFELP loans. Even there, there is a wrinkle, because CBO assigns the poor performance of the subsequent consolidations to the original FFELP program accounts; CBO interprets the federal credit reform act of 1990 to treat consolidation as a repayment plan option on the original Stafford and PLUS loan, rather than a whole new loan, as OMB does. If you were a credit bureau, would you consider the borrower's debt to be zero just because he consolidated? Of course not. There is a continued debt until the borrower's debt as a whole is paid down. CBO's interpretation makes sense. A common-sense way to solve the 9.5% dilemma a couple years back would have been to consolidate FFELP loans associated with those special allowance rates into DL.