Mailbag: Fixing FFEL Issues with Public Service Loan Forgiveness (PSLF)

Michael Lux Student Loan Blog, Student Loan Forgiveness 0 Comments

Though discontinued, FFEL loans continue to cause significant issues for federal student loan borrowers seeking Public Service Loan Forgiveness (PSLF).

Federal Family Education Loan (FFEL) program loans not federally held are not eligible for PSLF. However, borrowers can convert them into eligible loans through Federal Direct Consolidation.

Unfortunately, this fix restarts the clock on student loan forgiveness.

Recent legislation attempted to resolve some of the issues with PSLF, but the FFEL problems remain. Many borrowers are hoping for a fix, but unsure of how to proceed with their student loan planning.

Reader Question: Should I Restart the PSLF Forgiveness Clock by Consolidating FFEL Loans?

The dilemma many public service workers face from FFEL loans is complicated. A recent reader email shows this challenge:

I worked as a social worker at a non-profit hospital for over 20 years and have faithfully paid my FFEL student loans since 2002. I recently learned that, since I haven’t made my payments to the Department of Education as Direct loans, my payments don’t count towards the PSLF program.

Does it make sense to consolidate my FFEL loans into a Direct loan to apply for the PSLF program with a 71,000 balance remaining and a 2037 payoff date? Are there any other “rare” or exceptional reasons I can explore to request loan forgiveness/cancellation?

The Decision to Move Forward on FFEL Consolidation

One of the risks of moving forward with consolidation is losing progress towards income-driven student loan forgiveness.

FFEL loans are eligible for forgiveness after 25 years of payments on the Income-Based Repayment (IBR) plan. Borrowers who made years of IBR payments towards their FFEL loans have to make a difficult decision. If they consolidate, the IBR progress goes back to zero. If they don’t, PSLF is impossible.

Both options come with risks:

  • IBR forgiveness might be expensive. Forgiveness for IBR borrowers takes 25 years. At the end of the 25 years, the IRS taxes the forgiven debt. The tax-free forgiveness of PSLF might make a fresh start worth the effort.
  • Consolidating is a commitment to PSLF. Restarting the clock is a bet on a successful PSLF application in 10 years. What happens if you lose your PSLF job and cannot complete the required ten years? What happens if your application is denied for some other issue?

Finally, borrowers have the repayment in full option. In some cases, the least expensive route to debt elimination may be aggressive repayment.

Jumping back to our reader email, there isn’t a clear answer to the consolidation question. The best thing a borrower can do is to play out the various options. Think about how much each strategy would cost if things go according to plan. Think about the way things might not go to plan.

One of the best tools for exploring choices is the Department of Education’s Loan Simulator. The Loan Simulator can factor in salary changes, repayment plan choices, and multiple types of forgiveness. It is one of the most helpful resources on the federal student aid website.

Further complicating this situation is the possibility of changes on the horizon. Another reader email lays out the issues.

Reader Question: Should Possible Changes to the PSLF Rules Impact My Decision?

My wife is a school teacher with approximately 110 of the 120 required eligible payments necessary for PSLF. We recently realized that not all her loans are eligible for PSLF because the loans are FFEL loans.

Since the FFEL loans will be paid off before 10 years, I do not see a reason to consolidate the loans because we would never reach the 120 payments required. I also do not want to risk accidentally including the current loans eligible for PSLF into the consolidation.

With the Biden administration seeming open to student loan forgiveness, we decided to look into what student loan forgiveness might be available through his administration. Most articles I have read believe the loan forgiveness will only be eligible to federal loans and not FFEL loans.

If this is the case, should we consolidate her FFEL loans now, wait until her PSLF loans are forgiven, or make no changes? Would the FFEL loans be required to be consolidated for a certain time period before potential forgiveness under Biden’s administration? Any additional insight on what student loan forgiveness might look like, if any, during Biden’s administration? I understand the questions regarding Biden’s administration loan forgiveness are impossible to really answer, so I guess I am asking for your gut instincts/intuition.

The Department of Education and Fixing PSLF

The initial rejection rate of PSLF applications was over 99%. As more borrowers applied, many expected the approval rates to improve. Unfortunately, the rejection rate remains well over 90%.

One fix has been the creation of Temporary Expanded Public Service Loan Forgiveness. TEPSLF helps borrowers who signed up for the wrong repayment plan.

Sadly, TEPSLF does not help borrowers with FFEL issues.

As noted in the second reader email, President Biden supports student loan forgiveness in the form of $10,000 of debt cancellation. Additionally, he has expressed a desire to help PSLF applicants. With the precedent of TEPSLF, it is reasonable for borrowers to hope for further improvements to PSLF for FFEL borrowers.

Here again, there are two paths for borrowers, and both have risks:

  • Consolidate and hope for general loan forgiveness or cancellation. If there is any federal debt cancellation, it will likely only apply to federally-held student loans. Borrowers with FFEL loans may miss out. Federal direct consolidation could increase the odds of debt cancellation if it happens.
  • Keep the loans as FFEL and hope for a specific fix. The Department of Education or Congress may address PSLF for FFEL borrowers. Borrowers that consolidate may not be eligible for new FFEL specific relief.

Once again, aggressive repayment remains a third option. Rather than hoping for the government to act, the borrowers that eliminate their debt may save the most in the long run.

The Most Likely Student Loan Changes

Over the years, I’ve made many predictions on the most likely outcome to student loan proposals and events. The purpose behind making predictions is to help borrowers plan. In this instance, I think additional federal relief is unlikely, but say this will little certainty. FFEL specific help and general loan cancellation are both slim possibilities.

Borrowers should consider all options, stay on top of the news and developments, and be prepared to move quickly if things change.

Next Steps:

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