For many college students nearing graduation or having recently graduated, it may seem like there are too many options for consolidating school loans. However, consolidation options are being eliminated for many students.
The Deficit Reduction Act, which was signed into law on Feb. 8, 2006, eliminates the ability of most students and parents to re-consolidate their loans, no matter what other lender offers them a better deal down the road. Borrowers whose loans are owned by a single lender have long been barred from shopping around for better consolidation rates. Although Congress was scheduled to repeal that law, called the Single Holder Rule, the proposal to do so was dropped from the Deficit Reduction Act just before it was signed into law.
A loophole in the law has previously allowed lenders to circumvent the Single Holder Rule by moving an existing federal loan into a federal program, and then moving that loan back into their own consolidation program. However, the Higher Education Reconciliation Act (HERA), part of the Deficit Reduction Act, has also ended the ability to circumvent the Single Holder Rule.
The elimination of the loophole leaves students and graduates who have all of their loans with the same private lender stuck in a non-competitive market without the option to compare benefits from multiple lenders. (This does not apply to borrowers with ALL federal direct loans through the federal government.)
Because of these changes in the law, students who currently have many loans through one lender (excluding the federal direct loan program) and new students who are looking into their options for funding their educations should seriously consider having more than one lender. By having at least one loan from a different lender, students and graduates can still shop around for consolidators when they near graduation or during their six-month grace period between graduation and when their first loan payment is due.
There are many advantages to be had for a student who has the ability to shop around for consolidation lenders, such as principle and interest rate reductions, and lower monthly payments. Lenders like Student Lending Works can sometimes offer incremental reductions, which can be a great benefit for students.