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Consolidation of FFEL Federal Loans for Student Loan Forgiveness

Michael Lux Blog, Consolidation, Student Loans 7 Comments

The rejection rate for Public Service Student Loan Forgiveness is a horrifying 99%. Some of the problems that lead to rejection can be easily fixed, while others are far more complicated. Issues with Federal Family Education Loan Program or FFEL loans are among the most serious because there is no way to correct prior mistakes.

FFEL loans are not eligible for Public Service Loan Forgiveness. However, they can be consolidated into a federal direct loan to become eligible. Consolidating the right loans at the right time is extremely important.

Addressing FFEL loans for purposes of loan forgiveness can be complicated because there is no one size fits all answer. For some borrowers, direct consolidation is an essential step. For others, it could be a huge mistake setting them back years.

FFEL Loan Example

Today’s topic is one of the more advanced federal student loan issues, but it is something that affects many borrowers, and the wrong mistake could result in years of extra student loan payments.

Let’s start with what the worst-case scenario looks like:

– The borrower gets $200,000 to pay for medical school (though this issue applies to any graduate program).
– The borrower takes a public interest job, intending to have student loan debt forgiven after ten years.
– To qualify for public service forgiveness, the borrower signs up for a repayment plan based upon their income.
– The lender tells the borrower that their payments will count towards the 120 payments needed for public service forgiveness.
– After several years of making these payments, the borrower learns that because some of the loans were graduate PLUS loans made under the FFEL program, they are not eligible for public service student loan forgiveness.
– The borrower has to make student loan payments for several years extra because of this mistake.

The Issue with FFEL Loans and Public Service Student Loan Forgiveness

The most frustrating part about this example is the fact that this borrower could have had all their loans eligible for public service forgiveness had they consolidated from day one.

Here comes the most important sentence of this entire article: Some loans are not eligible for federal government public service forgiveness, but they can be made eligible if they are properly consolidated through federal government consolidation.

Many customer service representatives do not understand this wrinkle in student loan law. It is a classic example of why you can’t take financial planning advice from your student loan lender.

What loans does this apply to?

This is an issue with Perkins Loans, but it is most commonly associated with FFEL loans. The Federal Family Education Loan Program was in existence from the mid-’60s until 2010. Under the FFEL program, borrowers got federally insured loans through private companies.

If you received a Stafford Loan or a Graduate PLUS loan before 2010, you probably have an FFEL loan.

What to do with FFEL Loans?

FFEL Loans (with the notable exception of Parent PLUS loans) can be included in a federal direct consolidation. By consolidating, the FFEL loan becomes a Direct Loan eligible for forgiveness under the Public Service Student loan forgiveness (PSLF) program.

One word of caution: If you have been making IBR payments towards a loan and then include it in a loan consolidation, the previous payments will not count towards student loan forgiveness. When you consolidate, you start your countdown to 120 payments from scratch. If you have already been making payments and are thinking about consolidating to get your FFEL loans eligible for forgiveness, it is important to weigh the pros and cons of your options… some previous payments may not count, but more loans become eligible for PSLF.

Due to issues with the “forgiveness clock” restarting after consolidation, the best practice for borrowers with FFEL loans is to consolidate immediately at the beginning of loan repayment.

Not all borrowers were advised to consolidate their FFEL loans right away. Delayed consolidation might reach the point where it is better not to consolidate at all. Borrowers who are close to student loan forgiveness for their federal direct loans should be cautious not to consolidate their direct loans with the FFEL loans. In some cases, it may be best to pursue forgiveness on the forgiveness-eligible direct loans and to shift to Plan B on the FFEL loans.

A Note from the Sherpa
Handling FFEL loans is not the only factor to think about when consolidating federal loans. Borrowers should understand the consolidation process and exercise special care with Parent PLUS loans.

How do I avoid screwing this up?

If you have multiple student loans, go to the National Student Loan Database. Look for any Stafford, Perkins, or PLUS loan. Better yet, call or write your lender, and go loan by loan to verify whether your loans are federal direct loans or FFEL.

If you have FFEL loans, get them consolidated as soon as possible so that you can start making payments on them that count towards Public Service Student Loan Forgiveness.

One way to check whether or not you are doing things write would be to have some of your payments certified towards PSLF. If you can only get some loans certified and other loans don’t count, you may have an FFEL problem.

This is not an easy subject, but by identifying that you might have an FFEL problem, you can ask the right questions to your lender and get things under control. You can also warn your friends who may have the same issue.