In the United States, federal student loans are consolidated somewhat differently, as federal student loans are guaranteed by the U.S. government. In a federal student loan consolidation, existing loans are purchased and closed by a loan consolidation company or by the Department of Education (depending on what type of federal student loan the borrower holds). Interest rates for the consolidation are based on that year's student loan rate, which is in turn based on the 91-day Treasury bill rate at the last auction in May of each calendar year.[citation needed]
Student loan rates can fluctuate from the current low of 4.70% to a maximum of 8.25% for federal Stafford loans, 9% for PLUS loans.[citation needed] The current consolidation program allows students to consolidate once with a private lender, and reconsolidate again only with the Department of Education.[citation needed] Upon consolidation, a fixed interest rate is set based on the then-current interest rate. Reconsolidating does not change that rate. If the student combines loans of different types and rates into one new consolidation loan, a weighted average calculation will establish the appropriate rate based on the then-current interest rates of the different loans being consolidated together.
Federal student loan consolidation is often referred to as refinancing, which is incorrect because the loan rates are not changed, merely locked in. Unlike private sector debt consolidation, student loan consolidation does not incur any fees for the borrower; private companies make money on student loan consolidation by reaping subsidies from the federal government.
Student loan consolidation can be beneficial to students' credit rating, but it's important to note that not all federal student loan consolidation companies report their loans to all credit bureaus.[
Showing posts with label Consolidation. Show all posts
Showing posts with label Consolidation. Show all posts
Monday, July 9, 2007
Debt Consolidation
Debt consolidation entails taking out one loan to pay off many others. This is often done to secure a lower interest rate, secure a fixed interest rate or for the convenience of servicing only one loan.
Debt consolidation can simply be from a number of unsecured loans into another unsecured loan, but more often it involves a secured loan against an asset that serves as collateral, most commonly a house. In this case, a mortgage is secured against the house. The collateralization of the loan allows a lower interest rate than without it, because by collateralizing, the asset owner agrees to allow the forced sale (foreclosure) of the asset to pay back the loan. The risk to the lender is reduced so the interest rate offered is lower.
Sometimes, debt consolidation companies can discount the amount of the loan. When the debtor is in danger of bankruptcy, the debt consolidator will buy the loan at a discount. A prudent debtor can shop around for consolidators who will pass along some of the savings. Consolidation can affect the ability of the debtor to discharge debts in bankruptcy, so the decision to consolidate must be weighed carefully.
Debt consolidation is often advisable in theory when someone is paying credit card debt. Credit cards can carry a much larger interest rate than even an unsecured loan from a bank. Debtors with property such as a home or car may get a lower rate through a secured loan using their property as collateral. Then the total interest and the total cash flow paid towards the debt is lower allowing the debt to be paid off sooner, incurring less interest. In practice, many people are in credit card debt because they spend more than their income. If that habit continues, the consolidation will not benefit them much because they will simply increase their credit card balances again.
Because of the theoretical advantage that debt consolidation offers a consumer that has high interest debt balances, companies can take advantage of that benefit of refinancing to charge very high fees in the debt consolidation loan. Sometimes these fees are near the state maximum for mortgage fees. In addition, some unscrupulous companies will knowingly wait until a client has backed themselves into a corner and must refinance in order to consolidate and pay off bills that they are behind on the payments. If the client does not refinance they may lose their house, so they are willing to pay any allowable fee to complete the debt consolidation. In some cases the situation is that the client does not have enough time to shop for another lender with lower fees and may not even be fully aware of them. This practice is known as predatory lending. Certainly many, if not most, debt consolidation transactions do not involve predatory lending.
In recent years, reports in the media have raised concerns about the use of consolidation loans.[1] The worry is that many people are tempted to consolidate unsecured debt into secured debt, usually secured against their home. Although the monthly payments can often be lower, the total amount repaid is often significantly higher due to the long period of the loan. Debt consolidation sometimes only treats the symptoms of debt and does not address the root problem. In some circumstances, snowballing debt may be a better solution.
There are other alternatives to a debt consolidation loan, where unsecured debt is not "shifted" to secured debt, but is eliminated through a settlement or payment plan. Debt consolidation can be confusing for many people, so it is helpful to learn about all of your options, and sometimes with the help of an advisor.
Debt consolidation can simply be from a number of unsecured loans into another unsecured loan, but more often it involves a secured loan against an asset that serves as collateral, most commonly a house. In this case, a mortgage is secured against the house. The collateralization of the loan allows a lower interest rate than without it, because by collateralizing, the asset owner agrees to allow the forced sale (foreclosure) of the asset to pay back the loan. The risk to the lender is reduced so the interest rate offered is lower.
Sometimes, debt consolidation companies can discount the amount of the loan. When the debtor is in danger of bankruptcy, the debt consolidator will buy the loan at a discount. A prudent debtor can shop around for consolidators who will pass along some of the savings. Consolidation can affect the ability of the debtor to discharge debts in bankruptcy, so the decision to consolidate must be weighed carefully.
Debt consolidation is often advisable in theory when someone is paying credit card debt. Credit cards can carry a much larger interest rate than even an unsecured loan from a bank. Debtors with property such as a home or car may get a lower rate through a secured loan using their property as collateral. Then the total interest and the total cash flow paid towards the debt is lower allowing the debt to be paid off sooner, incurring less interest. In practice, many people are in credit card debt because they spend more than their income. If that habit continues, the consolidation will not benefit them much because they will simply increase their credit card balances again.
Because of the theoretical advantage that debt consolidation offers a consumer that has high interest debt balances, companies can take advantage of that benefit of refinancing to charge very high fees in the debt consolidation loan. Sometimes these fees are near the state maximum for mortgage fees. In addition, some unscrupulous companies will knowingly wait until a client has backed themselves into a corner and must refinance in order to consolidate and pay off bills that they are behind on the payments. If the client does not refinance they may lose their house, so they are willing to pay any allowable fee to complete the debt consolidation. In some cases the situation is that the client does not have enough time to shop for another lender with lower fees and may not even be fully aware of them. This practice is known as predatory lending. Certainly many, if not most, debt consolidation transactions do not involve predatory lending.
In recent years, reports in the media have raised concerns about the use of consolidation loans.[1] The worry is that many people are tempted to consolidate unsecured debt into secured debt, usually secured against their home. Although the monthly payments can often be lower, the total amount repaid is often significantly higher due to the long period of the loan. Debt consolidation sometimes only treats the symptoms of debt and does not address the root problem. In some circumstances, snowballing debt may be a better solution.
There are other alternatives to a debt consolidation loan, where unsecured debt is not "shifted" to secured debt, but is eliminated through a settlement or payment plan. Debt consolidation can be confusing for many people, so it is helpful to learn about all of your options, and sometimes with the help of an advisor.
Consolidation
Consolidation or Amalgamationis the act of merging many things into one. In business, it often refers to the mergers or acquisitions of many smaller companies into much larger ones. The financial accounting term of consolidation refers to the aggregated financial statements of a group company as consolidated account. The taxation term of consolidation refers to the treatment of a group of companies and other entities as one entity for tax purposes. Under the [[Halsburys Laws of England]], 'amalgamation' is defined as "a blending together of two or more undertakings into one undertaking, the shareholders of each blending company, becoming, substantially, the shareholders of the blended undertakings. There may be amalgamations, either by transfer of two or more undertakings to a new company, or to the transfer of one or more companies to an existing company". Thus, the two concepts are, substantially, the same.
There are three forms of business combinations:
Statutory Merger: a business combination that results in the liquidation of the acquired company’s assets and the survival of the purchasing company.
Statutory Consolidation: business combination that creates a new company in which none of the previous companies survive.
Stock Acquisition: a business combination in which the purchasing company acquires the majority, more than 50%, of the common stock of the acquired company and both companies survive.
Amalgamation: Means an existing Company which is taken over by another existing company. In such course of amalgamation, the consideration may be paid in cash or in Kind, and the purchasing company servises in this process.
[edit] Common Terminology Used in Business Consolidations
Parent-subsidiary relationship: the result of a stock acquisition where the parent is the acquiring company and the subsidiary is the acquired company.
Controlling Interest: When the parent company owns a majority of the common stock.
Non-controlling interest or Minority interest: the rest of the common stock that the other shareholders own.
Wholly owned subsidiary: when the parent owns all the outstanding common stock of the subsidiary.
Amalgamated Company is formed when in the process of amalgamation, the combined company is formed out of the transaction. The amalgamated company is otherwise called the transferee company. The company or companies, which merge into the new company, are called the transferor companies and, the company, into which the transferor companies merge, is known as the transferee company.
"Amalgamating company" : The company or companies, which are merged, are called the "amalgamating companies". The amalgamating company or companies are also called the "transferor company/companies."
[edit] Accounting treatment (USGAAP)
A company can acquire another company in two ways:
By purchasing the net assets.
By purchasing the common stock of another company.
Regardless of the method of acquisition direct costs, costs of issuing securities and indirect costs are treated:
Direct costs: the acquiring company capitalizes direct costs paid to outside parties as part of the total acquisition cost.
Costs of issuing securities: these costs reduce the issuing price of the stock.
Indirect and general costs: the acquiring company expenses these costs as they are incurred.
Purchase of Net Assets
Treatment to the acquiring company:
When purchasing the net assets the acquiring company records in its books the receipt of the net assets and the disbursement of cash, the creation of a liability or the issuance of stock as a form of payment for the transfer.
Treatment to the acquired company:
The acquired company records in its books the elimination of its net assets and the receipt of cash, receivables or investment in the acquiring company (if what was received from the transfer included common stock from the purchasing company). If the acquired company is liquidated then the company needs an additional entry to distribute the remaining assets to its shareholders.
Purchase of common stock
Treatment to the purchasing company
When the purchasing company acquires the subsidiary through the purchase of its common stock, it records in its books the investment in the acquired company and the disbursement of the payment for the stock acquired.
Treatment to the acquired company:
The acquired company records in its books the receipt of the payment from the acquiring company and the issuance of stock.
FASB 141 Disclosure Requirements FASB 141 requires disclosures in the notes of the financial statements when business combinations occur. Such disclosures are: The name and description of the acquired entity and the percentage of the voting equity interest acquired. The primary reasons for acquisition and descriptions of factors that contributed to recognition of goodwill. The period for which results of operations of acquired entity are included in the income statement of the combining entity. The cost of the acquired entity and if it applies the number of shares of equity interest issued, the value assigned to those interests and the basis for determining that value. Any contingent payments, options or commitments. The purchase and development assets acquired and written off.
[edit] Reporting Intercorporate Interest – Investments in Common Stock
1. 20 % ownership or less:
When a company purchases 20% or less of the outstanding common stock, the purchasing company’s influence over the acquired company is not significant. (APB 18 specifies conditions where ownership is less than 20% but there is significant influence).
The purchasing company uses the cost method to account for this type of investment. Under the cost method, the investment is recorded at cost at the time of purchase. The company does not need any entries to adjust this account balance unless the investment is considered impaired or there are liquidating dividends, both of which reduce the investment account.
Liquidating dividends: Liquidating dividends occur when there is an excess of dividends declared over earnings of the acquired company since the date of acquisition. Regular dividends are recorded as dividend income whenever they are declared.
Impairment loss: An impairment loss occurs when there is a decline in the value of the investment other than temporary.
2. 20% to 50 ownership
When the amount of stock purchased is between 20% and 50% of the common stock outstanding, the purchasing company’s influence over the acquired company is often significant. The deciding factor, however, is significant influence. If other factors exist that reduce the influence or if significant influence is gained at an ownership of less than 20%, the equity method may be appropriate (FASB interpretation 35 underlines the circumstances where the investor is unable to exercise significant influence). To account for this type of investment the purchasing company uses the equity method. Under the equity method, the purchaser records its investment at original cost. This balance increases with income and decreases for dividends from the subsidiary that accrue to the purchaser.
Treatment of Purchase Differentials: At the time of purchase, purchase differentials arise from the difference between the cost of the investment and the book value of the underlying assets.
Purchase differentials have two components:
The difference between the fair market value of the underlying assets and their book value.
Goodwill: the difference between the cost of the investment and the fair market value of the underlying assets.
Purchase differentials need to be amortized over their useful life; however, new accounting guidance states that goodwill is not amortized or reduced until it is permanently impaired, or the underlying asset is sold.
3. More than 50% ownership
When the amount of stock purchased is 50% of the outstanding common stock, the purchasing company has control over the acquired company. Control in this context is defined as ability to direct policies and management. In this type of relationship the controlling company is the parent and the controlled company is the subsidiary. The parent company needs to issue consolidated financial statements at the end of the year to reflect this relationship. Consolidated financial statements show the parent and the subsidiary as one single entity. During the year, the parent company can use the equity or the cost method to account for its investment in the subsidiary. Each company keeps separate books. However at the end of the year a consolidation working paper is prepared to combine the separate balances and to eliminate the intercompany transactions, the subsidiary’s stockholder equity and the parent’s investment account. The result is one set of financial statements that reflect the financial results of the consolidated entity.
There are three forms of business combinations:
Statutory Merger: a business combination that results in the liquidation of the acquired company’s assets and the survival of the purchasing company.
Statutory Consolidation: business combination that creates a new company in which none of the previous companies survive.
Stock Acquisition: a business combination in which the purchasing company acquires the majority, more than 50%, of the common stock of the acquired company and both companies survive.
Amalgamation: Means an existing Company which is taken over by another existing company. In such course of amalgamation, the consideration may be paid in cash or in Kind, and the purchasing company servises in this process.
[edit] Common Terminology Used in Business Consolidations
Parent-subsidiary relationship: the result of a stock acquisition where the parent is the acquiring company and the subsidiary is the acquired company.
Controlling Interest: When the parent company owns a majority of the common stock.
Non-controlling interest or Minority interest: the rest of the common stock that the other shareholders own.
Wholly owned subsidiary: when the parent owns all the outstanding common stock of the subsidiary.
Amalgamated Company is formed when in the process of amalgamation, the combined company is formed out of the transaction. The amalgamated company is otherwise called the transferee company. The company or companies, which merge into the new company, are called the transferor companies and, the company, into which the transferor companies merge, is known as the transferee company.
"Amalgamating company" : The company or companies, which are merged, are called the "amalgamating companies". The amalgamating company or companies are also called the "transferor company/companies."
[edit] Accounting treatment (USGAAP)
A company can acquire another company in two ways:
By purchasing the net assets.
By purchasing the common stock of another company.
Regardless of the method of acquisition direct costs, costs of issuing securities and indirect costs are treated:
Direct costs: the acquiring company capitalizes direct costs paid to outside parties as part of the total acquisition cost.
Costs of issuing securities: these costs reduce the issuing price of the stock.
Indirect and general costs: the acquiring company expenses these costs as they are incurred.
Purchase of Net Assets
Treatment to the acquiring company:
When purchasing the net assets the acquiring company records in its books the receipt of the net assets and the disbursement of cash, the creation of a liability or the issuance of stock as a form of payment for the transfer.
Treatment to the acquired company:
The acquired company records in its books the elimination of its net assets and the receipt of cash, receivables or investment in the acquiring company (if what was received from the transfer included common stock from the purchasing company). If the acquired company is liquidated then the company needs an additional entry to distribute the remaining assets to its shareholders.
Purchase of common stock
Treatment to the purchasing company
When the purchasing company acquires the subsidiary through the purchase of its common stock, it records in its books the investment in the acquired company and the disbursement of the payment for the stock acquired.
Treatment to the acquired company:
The acquired company records in its books the receipt of the payment from the acquiring company and the issuance of stock.
FASB 141 Disclosure Requirements FASB 141 requires disclosures in the notes of the financial statements when business combinations occur. Such disclosures are: The name and description of the acquired entity and the percentage of the voting equity interest acquired. The primary reasons for acquisition and descriptions of factors that contributed to recognition of goodwill. The period for which results of operations of acquired entity are included in the income statement of the combining entity. The cost of the acquired entity and if it applies the number of shares of equity interest issued, the value assigned to those interests and the basis for determining that value. Any contingent payments, options or commitments. The purchase and development assets acquired and written off.
[edit] Reporting Intercorporate Interest – Investments in Common Stock
1. 20 % ownership or less:
When a company purchases 20% or less of the outstanding common stock, the purchasing company’s influence over the acquired company is not significant. (APB 18 specifies conditions where ownership is less than 20% but there is significant influence).
The purchasing company uses the cost method to account for this type of investment. Under the cost method, the investment is recorded at cost at the time of purchase. The company does not need any entries to adjust this account balance unless the investment is considered impaired or there are liquidating dividends, both of which reduce the investment account.
Liquidating dividends: Liquidating dividends occur when there is an excess of dividends declared over earnings of the acquired company since the date of acquisition. Regular dividends are recorded as dividend income whenever they are declared.
Impairment loss: An impairment loss occurs when there is a decline in the value of the investment other than temporary.
2. 20% to 50 ownership
When the amount of stock purchased is between 20% and 50% of the common stock outstanding, the purchasing company’s influence over the acquired company is often significant. The deciding factor, however, is significant influence. If other factors exist that reduce the influence or if significant influence is gained at an ownership of less than 20%, the equity method may be appropriate (FASB interpretation 35 underlines the circumstances where the investor is unable to exercise significant influence). To account for this type of investment the purchasing company uses the equity method. Under the equity method, the purchaser records its investment at original cost. This balance increases with income and decreases for dividends from the subsidiary that accrue to the purchaser.
Treatment of Purchase Differentials: At the time of purchase, purchase differentials arise from the difference between the cost of the investment and the book value of the underlying assets.
Purchase differentials have two components:
The difference between the fair market value of the underlying assets and their book value.
Goodwill: the difference between the cost of the investment and the fair market value of the underlying assets.
Purchase differentials need to be amortized over their useful life; however, new accounting guidance states that goodwill is not amortized or reduced until it is permanently impaired, or the underlying asset is sold.
3. More than 50% ownership
When the amount of stock purchased is 50% of the outstanding common stock, the purchasing company has control over the acquired company. Control in this context is defined as ability to direct policies and management. In this type of relationship the controlling company is the parent and the controlled company is the subsidiary. The parent company needs to issue consolidated financial statements at the end of the year to reflect this relationship. Consolidated financial statements show the parent and the subsidiary as one single entity. During the year, the parent company can use the equity or the cost method to account for its investment in the subsidiary. Each company keeps separate books. However at the end of the year a consolidation working paper is prepared to combine the separate balances and to eliminate the intercompany transactions, the subsidiary’s stockholder equity and the parent’s investment account. The result is one set of financial statements that reflect the financial results of the consolidated entity.
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