Heather:

I consolidated in 2005 all my federal loans through a private organization.  It offered incentives (e.g., .125 interest rate reduction immediately upon entering repayment, .25 interest rate reduction if you sign up for the automatic debit plan, and 1.0 interest rate reduction after 20 on-time monthly payments).  I’ve been paying pay my consolidated loan since 2005 and have qualified for all 3 rate reductions.  Now, I am contemplating a career in public service and am trying to determine what my interest rate would be after I reconsolidate my loan with Direct Loans (the necessary step to qualifying for PSLF).

I spoke with Direct Loans to determine how they would reconsolidate my consolidate loan and what my new interest rate would be. They report that they would take my current interest rate on my consolidated loan.  My “current interest rate” is what my servicer would report to them on the loan verification certificate is my current outstanding indebtedness and current interest rate.  I also spoke with my private servicer, and they report that they would provide Direct Loans not with my current interest rate (reflecting the 3 rate reductions equaling less than 1.5%), but my original interest rate - as they called it, my “contractual rate” prior to applying any rate reductions.

I am going to review a copy of my promissory note and any documentation I’ve received from my private servicer over the years explaining how these rate reductions work and the terms thereof.  But, I don’t expect to see anything related to PSLF and what they would report to Direct Loans in the event one of their customers needed to reconsolidate under Direct Loans to qualify for PSLF.

After talking to Direct Loans, I understand that in most cases of reconsolidation, private servicers won’t “roll over” interest rate reductions and will use the original interest rate that was in place right at the start of repayment as what’s reported to Direct Loans which then takes it and applies their weighted average formula.  I have a couple questions: (1) Is it really up to each servicer to decide if they’re going to report the original interest rate, or the rate in place at the time the request for reconsolidation is made by Direct Loans?  Their unwillingness to lose customers is understandable, but do they really get to decide what rate they’re going to report?;  (2) How are borrowers protected here (in my case, this is a difference in the tens of thousands) if servicers don’t indicate that they will not roll over these rate reduction incentives (which in my mind, you’ve “earned” since you’ve made the requisite number of online payment or signed up for automatic debit, etc. with that servicer)  in any of the paperwork (e.g., Promissory Note) and there’s no adequate disclosure?; and (3) Even if private servicers as a general matter (or industry practice) don’t roll over these rate reductions when the account is reconsolidated, what about compelling them to do so in cases like mine, where the impetus to reconsolidate through Direct Loans is simply to qualify for PSLF?  (And shouldn’t private servicers support the public policy of PSLF given the protections they do receive from the federal government w/ respect to when they service federal loans? And shouldn’t Direct Loans recognize these rate reductions, since they’ve offered in the past through the Direct Loan program, consolidation incentives, and individual loan repayment incentives?)

Thanks - any help/guidance/insight into this question would be greatly appreciated.

I understand your concern and agree that it stinks that you forfeit these interest rate reductions by reconsolidating, but to the best of my knowledge that is indeed the case.  The interest rate reductions you have earned (sometimes referred to as borrower incentive programs), are considered discounts provided at the election of certain lenders, under specific circumstances, to a subset of borrowers.  I am not aware of any successful argument that a borrower is entitled to retain these discounts upon reconsolidation.  Borrowers used to have a lot of choice about which consolidation loan to get, so lenders offered things like this to differentiate their “products”.

To decide whether it is worthwhile to consolidate, you need to compare the value of your current rate reductions to the potential value of PSLF, which as you know requires consolidation into Federal Direct.  That’s not easy to do with confidence, since you have to make so many assumptions about future salaries and career paths in order to quantify the value of PSLF and IBR.

I’ll run your points by some other advocates to see whether anyone else sees any creative ways to pursue your arguments further, and let you know if I hear anything more.

Thank you, Heather.