After the Biden Administration announced a critical deadline the day after it passed, FFELP borrowers have all had the same question. What do I do now?
I’ve gone back on forth on whether or not this site should address the consolidation question. The problem is that there isn’t an easy answer. We may look back in a couple of years and say that FFELP borrowers definitely should have consolidated. Likewise, we could look back and realize it would have been a colossal mistake.
Outside of a couple of exceptions we will discuss, there is no easy answer to the FFELP consolidation question.
However, it is a worthwhile topic to explore. I will try to share as much information as possible so that FFELP borrowers can make the best decision based on the limited information available.
The Problem with FFELP Student Loans
Many, though not all, FFELP loans are owned by private or commercial lenders. These loans are federal, but not federally held. The debt is still a federal loan because the federal government guarantees payment, but a private lender gets the profits. The program was discontinued just over a decade ago.
Because of their ambiguous status, FFELP loans qualify for some federal programs but not all. For example, FFELP loans are eligible for the Income-Driven Repayment plan but not the Revised Pay As You Earn plan.
Borrowers with FFELP loans can consolidate their loans into a federal direct loan, through federal direct consolidation. This process creates a new federal direct loan and pays off the existing FFELP loan.
Even under the best circumstances, consolidation comes with significant pros and cons. In the case of FFELP loans right now, consolidation is even more complicated because of the uncertainty of the one-time forgiveness program.
A Note About Federally-Held FFELP Loans: Not all FFELP loans are held by a private lender. If you have an FFELP loan that benefited from the Covid-19 payment and interest freeze, the loan is federally-held.
Federally-held FFELP loans will qualify for the one-time forgiveness program.
FFELP Consolidation and Biden’s One-Time Forgiveness
As of right now, the stated policy of the Department of Education is that commercially-held FFEL loans are not eligible for the one-time forgiveness. Additionally, consolidating into a direct loan does not cure this issue.
However, the Department of Education is actively trying to address this issue. Whether or not they can resolve it is a critical question that remains unanswered.
By consolidating today, borrowers may eventually qualify for the $10,000 or $20,000 of loan cancellation. Likewise, it is possible that consolidating today could mean that borrowers miss out on an eventual fix.
Critically, consolidating now could still be an essential move for some borrowers. Factors outside of one-time forgiveness may drive the decision for many.
Sherpa Thought: I don’t have any inside information on this topic, but if I had to guess, your Biden Forgiveness eligibility won’t change whether or not you consolidate right now.
If the administration fixes the issue, I think all FFELP borrowers will benefit whether or not the consolidated. If they can’t fix the problem, everybody misses out.
FFELP Consolidation Considerations Beyond $10,000 of Loan Cancellation
The most pressing concern of most FFELP borrowers is erasing $10,000 from their balance.
However, there are many other items to consider.
If you have FFELP loans, you need to think about eliminating the entire balance — not just $10,000.
When we think about things in terms of the larger balance, the decision on consolidation can become more apparent.
Potential Reasons to Consolidate Your FFELP Loans
There are a couple of temporary federal programs that could be more valuable than the one-time forgiveness opportunity.
Limited Waiver on PSLF – If you apply to consolidate before October 31, 2022, you can take advantage of the Limited Waiver on PSLF. Under the limited waiver, payments made towards an FFELP loan can count towards Public Service Loan Forgiveness. If you miss this deadline, consolidating restarts the PSLF forgiveness clock. If you have worked for the government or a non-profit, take some time to investigate this program and the rules before you miss out on this opportunity.
IDR Payment Count Update – At some point in 2023, the Department of Education will update the IDR payment counts of borrowers. This update will potentially move many borrowers much closer to IDR forgiveness. Privately-held FFELP borrowers must consolidate their loans to take advantage of this opportunity.
Direct Loan Perks – By consolidating into a federal direct loan, borrowers add many new perks to their loans. For example, a federal direct loan is eligible for REPAYE, which comes with an excellent interest subsidy for some borrowers. Likewise, borrowers gain eligibility for PSLF and new programs that might be announced in the future.
If these considerations are more valuable than the one-time forgiveness program, it could make sense to consolidate now.
The Risks of FFELP Consolidation
While there are benefits to consolidating right now, there are some real dangers that borrowers should understand.
Increased Interest Rates – Some borrowers consolidated their student loans into an FFELP Consolidation Loan. One of the perks that commercial lenders could offer was a reduced interest rate. Many of these borrowers have interest rates below 3%. Consolidating into a federal direct loan means the interest rate is reset to the weighted average of the original federal loans’ interest rates.
If you don’t have an FFELP Consolidation Loan, this isn’t a concern. If you do have a premium interest rate, it is a significant risk to weigh.
Poison Pills – If you have privately-held FFELP loans and other federally-held loans, consolidating now could mean the new combined loan misses out on the one-time forgiveness. In this case, the best practice is to apply for the one-time relief immediately, and then later consolidate the remaining debt. (Note: borrowers can also choose to consolidate only certain federal loans.)
Along those same lines, if you have Parent PLUS loans, you should use caution when consolidating your federal debt.
What Does the Potential One-Time Forgiveness Fix Look Like?
Even though the latest news for FFELP borrowers has been awful, I still think they might eventually get the one-time forgiveness.
The abrupt rule change happened in an effort to win a lawsuit attempting to block the entire one-time forgiveness program. It was the legal equivalent of cutting off the hand to save the person.
The Biden Administration could attempt to negotiate a deal with the lenders currently profiting from the FFELP loans. If they strike a deal with these lenders, the specific litigation risk goes away, and borrowers can get their FFELP cancellation.
While we are talking lawsuits, it is also possible that a borrower suit gets filed. The Department of Education provided objectively bad guidance in light of the last-minute deadline. A class-action lawsuit could restore FFELP borrower eligibility.
At this point, Department of Education lawyers are likely exploring every possibility to correct the FFELP issue.
Making a Decision
For many FFELP borrowers, it is a mystery what is behind Door #1 and Door #2.
It is awful that such a critical decision must be made with limited information, but that is the current situation.