Single Holder Rule Loopholes
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.
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.
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.)
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.)
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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