Mailbag: FFEL Issues on Public Service Loan Forgiveness and REPAYE

Michael Lux Blog, Consolidation, Mailbag, Student Loans 0 Comments

In this edition of the Sherpa Mailbag we take a look at Mandy’s federal student loan issues, including a dreaded FFEL loan, sometimes also called an FFELP loan.  She is working on Public Service Student Loan Forgiveness, but the FFEL loan looks like it will get in the way of the best repayment plan or risk delaying forgiveness.  If you have a question for the Sherpa, feel free to ask us!

Mandy writes:

Dear Sherpa,

Thanks for your incredible blog!  For the last week I’ve been searching the dot gov and my SL servicer sites for answers to IBR plan questions to no avail and was so happy to find your Blog.  Even so, there are a few questions that still remain and hopefully you’ll be able to provide some insight to help me along.  I can imagine there are others with these issues too…and I’ve learned the hard way not to trust your loan servicer.

I’ve only recently learned about the new IBR plans, and need to make a change.  (I’m also coming off a unemployment defer.)  Which by the way, precluded me from making a change until it ended, or so I was told by the servicer.  This requirement also made me miss the annual recert for IBR!  #$%!

As a 40’s student I returned to college in 2007 for a bachelor’s and almost immediately after continued on to earn an MS. The 2007 loans are FFEL, about 10k, the remaining  75k are Stafford Direct, a mixture of sub and unsub.  -the timeline makes me an “old borrower” and disqualifies me for some IBRPs.

I’m single/divorced w/o dependents, basically sole earner, early 50s and need to keep my payments as low as possible.  I also just started working for another NGO so I qualify for PSLF again. (I have 2 years of ‘credit’ already applied from an earlier position.) -I know that the FFEL loans don’t/won’t qualify for forgiveness and I plan to simply pay those off like I did Perkins loans.  I cannot consolidate because it would start the clock over on the 120 payments.  Supposedly I couldn’t consolidate the FFEL loans under the original ICR because they would nullify the option for PSLF for the larger debt.

From my IBR research I think that REPAYE is my best option, it looks like I’d cap my Stafford Direct payments at 10% of income and could be eligible for forgiveness in 8 years with PSLF.  BUT will the FFEL loans through Navient (ugh) limit the IBR plan options for all of the loans, or can I just have REPAYE applied to my direct loans?  I’m willing to pay the 10 year standard pmt on the FFEL and don’t want to include them in any IBR.  Am I allowed?

I’d greatly appreciate your input on these options…this process just seems to become more difficult each time the Fed tries to ‘improve’ it.

Thank you!

Mandy

First Thoughts

This is very complicated situation and Mandy has already clearly done a lot of research.  The ideas here will be for Mandy’s specific situation.

The things that make Mandy’s situation difficult are the fact that she has one FFEL loan and her other loans are 20% of the way towards Public Service Loan Forgiveness.  Normally, federal direct consolidation would address the FFEL issue, but as Mandy noted, including her other loans would restart the clock on forgiveness.  Smartly, she realizes losing two years of work on the majority of her debt isn’t worth it for just a small portion of the debt.

Additionally, she has already identified REPAYE as the best repayment plan for her circumstances.  For others, especially couples, IBR or PAYE might be a better option.

Finally, when Mandy says that she has two years of credit on her other loans towards public service loan forgiveness, I’m going to assume that she has 24 certified payments.  If she has not yet certified her payments, before doing anything else, she needs to certify the payments.  It would be a mistake to make student loan plans around her keeping credit that she doesn’t actually have.  The only way to know for sure how much public service loan forgiveness credit you have is to mail in a completed employer certification form.

If you think you might be in this situation, make sure you first become familiar with the basics of Public Service Student Loan Forgiveness as well as the issues with dealing with FFEL loans.

A Little Consolidation

One route to consider would be federal direct consolidation.  Consolidation of all of Mandy’s federal loans would but a huge mistake (because of the forgiveness clock restarting), but consolidation of just the FFEL loan could cure Mandy’s issues.

If she consolidates just the FFEL loan, it becomes a federal direct consolidation loan.  As a direct consolidation loan, it is eligible for repayment plans like REPAYE and Public Service Student Loan forgiveness.  The Department of Education has a very helpful chart on repayment plan eligibility based upon loan type.

By using consolidation to turn the FFEL loan into an eligible loan for REPAYE and public service loan forgiveness, all of Mandy’s loans would be eligible for these programs.  This will make the paperwork much easier.

The danger with going this route is the risk of an error in the loan consolidation.  Normally, federal loans are all consolidated together.  However, all of the loans do not have to be included.  In Mandy’s case, she would be consolidating just a single loan.  Due to the uncommon nature of this move, it is critical that she keeps a close eye on all the documents and makes it clear to her servicer exactly what she wants done.  If she accidentally consolidates everything, she starts over on public service loan forgiveness.

Eliminate the FFEL Loan

Mandy seems to have accepted the fact that she will be paying off the FFEL loan in full.  Based upon the small size of the loan, she may be right.  It will depend upon her income in future years.

One way to get rid of the FFEL loan from the federal equation would be to pay it off by using private loan refinancing/consolidation.  Private lenders like SoFi and CommonBond pay off the old loan, in this case the FFEL loan, in its entirety.  In return, Mandy would agree to pay them back under terms of a new loan.  People normally go this route to get a lower interest rate to save on their spending over the life of the loan.  A full list of private lenders and some strategy tips are available on our consolidation and refinancing page.

The advantage of going this route would be that it makes all of Mandy’s federal loans uniform.  They all would be eligible for the same repayment plans and forgiveness and they all would be on the same timeline.  It also should save her money over the standard repayment plan, assuming she is able to qualify at a lower interest rate.  The disadvantage is that by taking her business to a private lender, the new private loan will never be eligible for income-driven repayment plans or public service loan forgiveness.

Bottom Line

FFEL loans can complicate student loan repayment.  While there are ways to fix these complications, the most important thing is that you don’t let one FFEL loan jeopardize the progress you have made on all of your other loans.