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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The single holder rule was repealed effective June 15, 2006 by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.