The differences between a federally-held student loan and a federal loan have never been more important.
Federally held loans are eligible for programs like Public Service Forgiveness. Federally held loans are the only loans that benefit from the Covid-19 payment and interest freeze.
Unfortunately, not all federal student loans are “federally held” loans. However, borrowers can convert federal loans into a federally held loan.
What is the Difference Between a Federal Loan and a Federally Held Loan?
The vast majority of federal student loans are “federally held” loans.
Some older student loans are federal, but not federally held. These loans include some Graduate PLUS loans, Parent PLUS loans, and Perkins loans.
With some PLUS loans, a commercial lender issued the loan, and the federal government guaranteed the loan. This practice ended in 2010, but many borrowers still have PLUS loans held by commercial lenders.
Similarly, many colleges issued Perkins loans guaranteed by the federal government. The Perkins Loan Program ended in 2017.
Thus, within the category of federal student loans, we have federally held loans and federally guaranteed loans held by commercial lenders or schools.
The major downside with the federally guaranteed loans is that they don’t qualify for Public Service Loan Forgiveness or benefit from the current Coronavirus relief. However, borrowers can fix this issue.
What Type of Federal Loan do I have?
The federal government keeps a database of all federal student loans.
Borrowers can see detailed loan information in the federal database. This information includes interest rates, loan servicers, and loan types. Navigating the federal student loan database is relatively easy.
These days, there is an easy way to determine if a loan is federally held. If a lender still requires payments during the federal payment freeze, the loan isn’t federally held.
Turning a Federal Loan into a Federally Held Loan
Borrowers who want to convert a federally guaranteed loan into a federally held loan can use student loan consolidation.
During federal direct consolidation, the Department of Education pays off old student loans and creates a new federal direct loan. Borrowers may use this process to turn FFEL loans into federal direct loans eligible for Public Service Loan Forgiveness.
Use Caution with Federal Direct Consolidation:Federal direct consolidation can fix some student loan issues but it can also cause problems. Mistakes in the federal consolidation process can cause progress towards loan forgiveness to be lost. Borrowers may also lose eligibility for certain repayment plans. Before consolidating, borrowers should understand the federal direct consolidation process and have a plan for their loans.
Help on the Horizon
Borrowers may be able to avoid the consolidation process.
The most recent Covid-19 relief bill passed in the House of Representatives included a special provision for borrowers affected by the “federally held” requirement.
The House bill would call for the Secretary of Education to make interest payments on commercially-held FFEL loans and institutionally-held Perkins loans.
However, the House Covid-19 relief bill has not gotten a vote in the Senate and is unlikely to become law. The 2020 election results could change things. If Democrats control the White House and the Senate, the proposed changes could become a reality.