Students Rush to Refinance as Deadline Approaches

But aid officials complain about misleading offers sent by lenders

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By KELLY FIELD

Washington

With the cost of consolidating student loans set to spike on July 1, college students and recent graduates are rushing to refinance their debt, and consolidation companies are scrambling for their business.

In recent weeks, lenders have bombarded borrowers with letters and e-mail messages exhorting them to lock in current interest rates before they rise by nearly two percentage points, to 7.14 percent. At least one lender is sending students checks worth hundreds of dollars that they can cash when they make their first payment on a consolidation loan.

But the lenders' aggressive and sometimes misleading sales pitches make many financial-aid advisers uneasy. They say they have been inundated with calls from worried students who have received offers that are disguised as overdue bills or official government correspondence.

One such letter, from Goal Financial LLC, reads, "Notice of Congressional Action. Failure to respond could result in limitations to your rights pursuant to Congressional bill S. 1932 and may expose you to federal rate increases effective 07/01/06."

Such offers "add to students' confusion about consolidation" and "create more work for financial-aid officers," said Pamela W. Fowler, director of financial aid at the University of Michigan at Ann Arbor.

Jessica L. Pierce, a 2006 graduate of the University of California at Santa Cruz, has been on the receiving end of the marketing blitz. On a bulletin board where she and her roommates post bills, she has tacked a dozen or so of the lenders' letters. The mailings form a crazy quilt of shrill warnings: "Last Chance!" "Deadline Nearing!" "Respond Immediately!" — a reminder to her roommates to refinance, but carefully.

Ms. Pierce says some of her friends were rushed into consolidating by such scare tactics, before weighing all their options. "When you get something that says 'Final Notice,' it's kind of scary," she said. "Some people have consolidated just out of fear."

Last Gasp for Consolidation?

In large part, the refinancing frenzy is occurring because consolidation will become a less attractive option after July 1. Until then, borrowers who apply to refinance their Stafford loans can lock in low rates — about 5.3 percent for college graduates and 4.7 percent for students still in school — saving thousands of dollars in future monthly bills.

After that date, the interest rate on consolidation loans made with existing Stafford loans will rise to 7.14 percent for college graduates, because of an increase in interest rates set by a Treasury Department auction in May. Students will no longer be able to consolidate while still in college, although students who consolidate within six months of graduating will continue to get a discount on their interest rate, under legislative changes contained in a bill approved by Congress last year that cut $12.7-billion from federal student-aid programs.

Moreover, the interest rate on new Stafford loans will be fixed at 6.8 percent, meaning that even if interest rates drop, students will not be able to lock in rates lower than 6.8 percent.

"There is a fair amount of push from lenders to get the last big bang in, because it's a pretty sure bet that things will level off some," said George Chin, financial-aid director at the City University of New York.

To create a sense of urgency among borrowers, consolidation companies have sent a flood of letters and e-mail messages warning them that failure to consolidate now could cost them thousands of dollars in interest. A few lenders have posted clocks on their Web sites ticking down the seconds until July 1, 2006.

The message seems to be getting through to students. Two of the largest consolidation companies, the College Loan Corporation and Chase Education Finance (formerly Collegiate Funding Services), report a threefold increase in call volume in the last couple of weeks.

After July 1, consolidation volume could drop by as much as 40 percent to 50 percent, some financial-aid experts say.

Still, rising interest rates and the shift to a fixed interest rate on new Stafford loans are unlikely to spell the end of consolidation, says Mark Kantrowitz, publisher of FinAid, a Web site about student aid. That's largely because consolidation will still offer borrowers a single monthly payment and access to extended repayment terms. Such benefits will become increasingly valuable as the average debt burden grows, he predicted.

In addition, the recent repeal of the so-called single-holder rule means that the pool of loans eligible for consolidation will continue to grow. The repeal, which was included in a supplemental spending bill that cleared Congress earlier this month, allows borrowers in the guaranteed-student-loan program to consolidate their loans with the company of their choice, not only with the company that originated their loans.

To attract these new borrowers, some lenders may begin offering interest-rate reductions that are not tied to on-time repayment or to automatic debiting, Mr. Kantrowitz predicted. He pointed to a recent announcement by one lender, MyRichUncle, that it would lower interest rates on Stafford and PLUS loans for parents and graduate students by 1 percent and 1.75 percent after July 1.

"Clearly that's the start of real competition on price," said Mr. Kantrowitz, who is on the lender's advisory board. "I wouldn't be surprised if we start seeing lenders say, 'We'll sacrifice some of our profits, but make the difference up in volume.'"

Illegal Inducements

Financial-aid advisers are urging their students, faced with a deluge of direct marketing, to consolidate with caution. Some have sent reminders to students and graduates to read the fine print of marketing offers, and to get promises in writing.

Rachel Jones, assistant director of financial aid at Brewton-Parker College, a Baptist institution in Georgia, mailed such a reminder after she received an anxious call from a graduate who had received a letter that looked like an official notice from the government. The graduate thought she had done something wrong, she said.

"While nothing in these letters is factually wrong, their tone is inappropriate," she wrote in a posting on the FinAid e-mail list for financial-aid directors. "I feel that it takes advantage of unsuspecting students and recent graduates."

Meanwhile, some financial-aid officers have complained to the Education Department about offers that promise borrowers cash rebates or other financial incentives in exchange for their business, saying they violate the "illegal inducements" clause of the Higher Education Act. The clause, which Congress added to the law in the late 1980s, bars lenders from offering "points, premiums, payments, or other inducements" to secure loan applications. Penalties range from a $27,500 fine to the loss of government backing on student loans.

Nancy C. Coolidge, who handles government relations and student aid for the University of California system, sent the department a letter from the Academic Loan Group that included a check made out to a student for $5,301 last year. She said she was told that the department could not pursue her complaint because she did not send the entire mailing.

However, the department did subsequently investigate the Academic Loan Group. In January the department's Office of Federal Student Aid sent a letter to the lender and its trustee, Deutsche Bank, notifying them that they had violated the inducements ban by offering loan applicants a 1-percent rebate for taking out a consolidation loan.

In a response, the Academic Loan Group said that it had stopped offering the upfront rebate in the fall of 2005, after it learned it was illegal, and had, since then, required borrowers to make one loan payment before receiving the rebate. The response satisfied the department, and no penalties were imposed.

But it was somewhat unusual for the department to even send a letter to the Academic Loan Group and Deutsche Bank. Typically, the department deals with complaints against consolidators by calling the lender and telling them to stop offering illegal inducements, a spokeswoman said. She said no consolidation companies have been penalized for violating the clause in the last couple of years.