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Single Holder Rule Loopholes

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The single holder rule is an anticompetitive rule that limits a student's choice of lenders for consolidation. If all of a student's FFELP loans are with a single lender, they must consolidate with that lender. If the student has FFELP loans with more than one lender, they can choose to consolidate their loans with any lender.

The early repayment status loophole also limits competition, because the holder of a continuing student's loans is under no obligation to grant early repayment status. If the holder refuses to grant early repayment status, it would appear that the student cannot consolidate with a different FFELP lender.

This section of FinAid describes several ways of bypassing these restrictions.

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The single holder rule was repealed effective June 15, 2006 by the Emergency Appropriations Act of 2006, eliminating the need for these loopholes.

Bypassing the Single Holder Rule

There are a variety of loopholes that allow a student to bypass the single holder rule. Some of the following loopholes have not yet been confirmed as valid by the US Department of education.

  • If the borrower certifies that he/she has "sought and has been unable to obtain a consolidation loan with income-sensitive repayment terms" from the holder of his/her loans, the borrower can consolidate with any lender. (HEA Section 428C(b)(1)(A))
  • If the borrower is "unable to obtain to obtain a consolidation loan with income-sensitive repayment terms acceptable to the borrower", the borrower can consolidate with the Federal Direct Consolidation Loan program. Even if the holder of the loans offers income-sensitive repayment terms, the borrower can consolidate with Federal Direct Consolidation by certifying that the income-sensitive repayment terms are not acceptable. (HEA Section 428C(b)(5))
  • If the borrower is still in school and has remaining Stafford Loan eligibility, the borrower can obtain a Stafford Loan from a different lender. (The single holder rule only limits a borrower's ability to choose a consolidation lender. It does not limit a borrower's ability to choose a different Stafford loan lender.) As soon as the borrower has FFELP loans with more than one lender, the single holder rule no longer applies.
  • If the borrower consolidates a Perkins Loan into a FFELP consolidation loan with a different lender, the single holder rule no longer applies. (Dear Partner Letters FP-04-06, FP-04-05, and FP-04-02)
  • Married students with loans from different lenders could bypass the single holder rule by consolidating their loans together. We do not recommend that married students consolidate their loans together. The ability to do this was repealed effective July 1, 2006.

Bypassing the Early Repayment Status Requirement

If a continuing student wishes to take advantage of the early repayment status loophole, but the current holder of the loans does not cooperate, there are several possible loopholes that may allow the student to bypass this restriction. Some of the following loopholes have not yet been confirmed as valid by the US Department of education. (The early repayment status loophole was closed by the Deficit Reduction Act of 2005, effective July 1, 2006.)

  • If the student has loans with more than one lender, and any of the lenders grant at least one of the student's loans early repayment status, the student can consolidate any or all of their student loans, even those for which a lender is refusing to grant early repayment status. This is because the language in sections 428C(b)(1)(A) and 428C(b)(4) that restricts the ability of FFEL lenders to make consolidation loans is defined in terms of eligible borrowers and not eligible student loans. An eligible borrower is defined in 428C(a)(3)(ii) has being in repayment status, in the grace period preceding repayment, or a rehabilitated defaulted borrower. So if a student has at least one loan in repayment status, they are an eligible borrower, and can consolidate any or all of their loans.

    Note, however, that the regulations at 34 CFR 682.201(c)(i) indicate that a borrower is eligible to receive a consolidation loan if the borrower is in repayment/grace period on the loans being consolidated. One might argue that this regulation prevents this method of bypassing the early repayment status requirement by limiting the definition of eligible borrower. But the regulation only gives satisficing conditions for eligibility and not necessary conditions for eligibility. The wording in the regulations is "if the individual" and not "if and only if the individual". The regulation is indicating that if an individual satisfies these conditions, they are eligible. But it does not state that individuals must satisfy these conditions to be eligible, and one can rely on the wording in the law at 428C(a)(3)(ii) to consider a borrower to be eligible even if they are consolidating loans that are not in repayment status, so long as the borrower has at least one loan in repayment status.

    The language in 428C(a)(3)(A)(ii) does not seem to require the loans in repayment status to be Stafford Loans. So a Perkins loan in repayment status might qualify a borrower as an eligible borrower, enabling the borrower to consolidate their loans despite a non-cooperative lender. Perkins Loans can be granted early repayment status because of 484(c)(4). Note that Perkins Loans are not sufficient on their own to bypass the single holder rule, as the language in 482C(b)(1)(A)(i) that defines the single holder rule talks about "multiple holders of loans under this part", where this part refers to Part B of the Higher Education Act. Perkins Loans are defined in Part E. However, the borrower could consolidate the Perkins Loan into a FFELP Consolidation Loan to bypass the single holder rule, or the borrower could indicate that he/she has been unable to obtain a consolidation loan with income-sensitive repayment terms from the holder of the loans selected for consolidation, and per 428C(b)(1)(A)(ii), consolidate with a different lender. Clearly, if the holder of the loans is refusing to grant early repayment status, the holder is also refusing to consolidate the loans, and thereby enables a third party lender to consolidate the loans of the eligible borrower.

  • The student can consolidate with Federal Direct Consolidation even if none of the student's loans are in repayment status, because the language in 428C(b)(5) is specified in terms of the word "borrower" and not "eligible borrower" and there is no context that would imply that the word "borrower" is telegraphing "eligible borrower". It is also clearly the intent of this paragraph that it not be limited to students who have one or more Direct Loans, so a borrower does not need to have at least one Direct Loan to consolidate with Federal Direct Consolidation.

Reconsolidating Direct Consolidation Loans as FFEL Consolidation Loans

After a borrower has consolidated with Federal Direct Consolidation, he or she can reconsolidate the direct consolidation loan with a FFELP lender. (Note: Reconsolidating the loan does not relock the interest rate under current law. This may change with reauthorization of the Higher Education Act.) Although one might argue that the borrower needs to have at least one unconsolidated FFELP loan to do this, the US Department of Education issued guidance in 2004 that stated that the Department would not enforce its interpretation of the single holder rule through September 1, 2005, or reauthorization of the Higher Education Act, whichever came first. (Dear Partner Letters FP-04-06, FP-04-05, and FP-04-02) One could also argue that the borrower becomes an eligible borrower through the Federal Direct Consolidation Loan, because 428C(a)(3)(B) cannot terminate a borrower's status as an eligible borrower because that status did not begin until after receipt of the consolidation loan. Although a Federal Direct Consolidation Loan does not normally qualify to bypass the single holder rule, the consolidation loan in this case was made under the authority of 428C(b)(5) and so qualifies as being received "under this section". Alternately, the borrower could exploit 428C(b)(1)(A)(ii) to consolidate the Federal Direct Consolidation Loan, arguing that the borrower is unable to obtain a consolidation loan with income-sensitive repayment terms and so can consolidate the Federal Direct Consolidation Loan with any lender. (Technically, the Federal Direct Consolidation Loan offers income-contingent repayment terms, not income-sensitive repayment terms.) Alternately, the US Department of Education indicated in Dear Partner Letter FP-04-07 that it would allow FFEL consolidations for borrowers who are consolidation only a Direct Consolidation Loan or who are consolidating only a Direct Consolidation Loan and a Perkins Loan.

Once the Federal Direct Consolidation Loan has been consolidated into a FFEL Consolidation Loan, the single holder rule no longer applies. (The US Department of Education has issued guidance that indicates that lenders may not penetrate the veil of a FFEL consolidation with regard to the single holder rule. The mere existence of a FFEL consolidation is sufficient to bypass the single holder rule, regardless of whether the loans included in the FFEL consolidation loan would have been sufficient to bypass the single holder rule.)

Caveats

Some of the loopholes described in this section of FinAid have not yet been confirmed as valid by the US Department of Education.

FinAid does not recommend consolidating a Perkins Loan while the borrower is still in school, because the borrower then loses the subsidized interest and the 9 month grace period. (If, however, the borrower requests early repayment status, the borrower loses the grace period but not the subsidized interest.) However, if the borrower needs to consolidate a Perkins Loan in order to bypass a lender who refuses to grant early repayment status, it is financially worthwhile to do so if the Stafford Loan balance is significantly greater than the Perkins Loan balance (i.e., at least 2-3 times greater). The borrower should consolidate the minimum amount of Perkins Loans necessary to bypass the single holder rule, and only pursue this if the borrower has a significant level of Stafford Loans (i.e., more than $7,500).

A married couple can consolidate their loans together to bypass the single holder rule if their loans are with different lenders. This is also an effective means of bypassing a lender that refuses to grant early repayment status to one of the couple's loans. However, FinAid does not recommend doing this, as the loans cannot be separated if the couple subsequently gets divorced. The couple will remain jointly and severally liable for the repayment of the consolidation loan. If the couple is undergoing an acrimonious divorce, the last thing they need is to provide each other with a tool they can use to ruin each other's credit ratings.

 

 
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