FFEL Consolidation and Loan Forgiveness

Michael Lux Blog, Mailbag, Student Loans 0 Comments

Over the last decade there have been a number of changes to federal student loans.  One of the biggest changes was the federal government’s move to direct lending.  In the past, the government guaranteed loans, but the lending and servicing was done through a third-party.  Now the money comes straight from the federal government.  This shift has created some potentially confusing situations for borrowers who have loans from the old system.

This is especially true for FFEL loans.  These loans are no longer issued and they are not eligible for programs like Public Service Student Loan Forgiveness.  However, they are able to be consolidated into a federal direct loan, and that new consolidated loan is eligible for Public Service Loan Forgiveness.  The classic issue with these loans can be seen in this email that we just received from a reader we will call “Jenny”.

Jenny writes:

I have been repaying my FFEL consolidation loans for the past 13 years. I understand that they are not eligible for loan forgiveness. for the past 13 years I have worked at public state universities. I still owe 16,000 (2 FFEL loans one for approx. $11,000 and one for approx. $4,000) They were consolidated in 2003 for fixed 4.75% interest rate. Would their be any benefit to trying to direct consolidate those consolidations and try for loan forgiveness under the public service program or am I better off staying with my current %, etc.

Two Paths

Jenny seems to have already done some research into this issue and understands that the current loan is not eligible for PSLF, but through federal direct consolidation, it can be eligible.  However, it should be noted that if she does go through federal direct consolidation, her interest rate will stay the same.  Federal direct consolidation uses a weighted average to determine the interest on a new direct consolidation loan, so the interest rate should be the same on the new combined loan.

Based upon Jenny’s circumstances there are two potential routes in which she can go with this situation.

Option #1: Federal Direct Consolidation and PSLF

Jenny could go through the direct consolidation process and get her debt eligible for Public Service Student Loan Forgiveness.  At that point, she could then enroll in an eligible Income Driven Student Loan repayment plan, and start the countdown on the 120 certified payments that she needs to have the loans forgiven.

This route would be far more tempting if Jenny had a larger student loan balance.  Depending upon her salary over the next ten years, it is possible that this debt will be paid off in its entirely by the time she makes all 120 payments to be eligible for forgiveness.  Even if there is a balance at the end, she might end up spending more money chasing forgiveness than what she would if she just aggressively paid off the debt.

If you have a lower monthly income and a larger balance, this option becomes a better route.

The one other concern to keep in mind with this option is to be careful about what loans get consolidated.  If Jenny had any federal direct loans, she might want to keep them separate from her FFEL loans.  She may have already made years worth of eligible payments on the direct loans and if she combines these loans with the FFEL loans, the new combined loan has a clock that has been reset to zero for purposes of loan forgiveness.

Option #2: Aggressive Repayment

$16,000 is a lot of money, but is certainly possible to pay off that amount in under 10 years.  If Jenny takes a look at her finances and decides she can pay it off in 5 years, that would save her a bunch of money in interest in the long run.

Another option within the aggressive repayment realm would be to consolidate the debt with a private lender such as SoFi or LendKey.  LendKey currently offers interest rates starting below 3%.  Opting with a private lender could help lower Jenny’s interest rate and as a result, help her pay off the loan faster.  The risk is that once the loan becomes a private loan, there is no going back.  Income driven payments are no longer an option and loan forgiveness is impossible.  However, if Jenny is certain she will be paying the debt off in full, and the only question is how much she will spend on interest, this route could save a bunch of money.  A full list of lenders offering this service can be found here.

Bottom Line

Jenny finds herself at a fork in the road.  She works in a position that is eligible for Public Service Student Loan Forgiveness, but by the time her debt is eligible, she may have it paid off.  Deciding on the proper route will require an honest assessment of her financial future and running the numbers.  Once she understands her options and does the math, the best route will hopefully be very clear.