Yesterday, Congress corrected an issue that has haunted student loan borrowers who have FFELP Joint Consolidation Loans.
After many years of missing out on the best repayment plans and forgiveness options, borrowers with spousal consolidation loans finally have a path forward.
The Problem with FFEL Spousal Loans and Joint Consolidation Loans
Prior to July 2006, married couples were given the option of combining their federal debt into a giant spousal consolidation loan. Many servicers encouraged borrowers to utilize this program.
Unfortunately, these loans presented significant issues in divorce and domestic violence cases. Even for spouses who remained happily married, joint consolidation loans caused logistical problems. Congress wisely chose to terminate the troubled program.
Sadly, when Congress ended spousal loans, they didn’t address what would happen to the borrowers who already had spousal loans.
As the years passed by, these borrowers fell through the cracks. Qualifying for forgiveness under a joint consolidation loan was difficult, if not impossible. The spousal loans were not eligible for the best repayment plans, and there was no way to fix the loan eligibility issues.
This site called FFELP Joint Consolidation Loans the absolute worst federal loan.
The Joint Consolidation Loan Separation Act
In a September surprise, Congress passed a bill allowing borrowers to get out of joint consolidation loans.
Couples with spousal loans will be able to apply to separate their combined loan into two individual direct consolidation loans. This means that borrowers can gain eligibility for preferred repayment plans and forgiveness opportunities.
The full text of the legislation provides two methods of separation. The preferred approach appears to be for a joint application signed by both parties. However, an individual can apply for separation in cases of domestic violence, economic abuse, or when the borrower cannot reasonably reach the other individual on the original loan.
The new direct consolidation loans will have the same interest rate as the original spousal loan.
How the Debt Gets Split in a Joint Consolidation Loan Separation
Each individual in a joint consolidation loan gets assigned a percentage of the debt. For example, suppose you have a total balance of $100,000 (including principal and interest) on your joint consolidation loan. If you are assigned 59% of the debt, your new federal direct consolidation loan will have a balance of $59,000. Your spouse’s, or ex-spouse’s, balance will be the remaining $41,000.
There are two ways to determine what percentage each individual is assigned.
Option 1: Original Loan Balances – If you had 37% of the debt when the loans were combined, you get 37% of the debt when the loan is separated.
Option 2: Formal Agreement – If you have a divorce decree, court order, or settlement agreement, the loans can be split according to the terms of the document.
It’s worth noting that payments made during the time of the joint consolidation loan don’t impact who gets what debt. The split is determined entirely by the original loan balances or the formal agreement between the individuals.
The Department of Education will issue final rules for servicers to use once President Biden signs the legislation.
Sherpa Thought: My hope is that the joint consolidation separation process serves as a blueprint for separating other consolidated federal student loans.
A Win for Advocates and Borrowers
As more information becomes available on the Join Consolidation Loan Separation Act, we can dig deeper into the eligibility rules and application procedure.
For now, it’s worth taking a moment to celebrate a big win for an overlooked group of borrowers.
For over 15 years, borrowers with joint consolidation loans were overlooked. New programs created to help borrowers often didn’t include joint consolidation loans. Even though the situation was objectively unfair to the affected borrowers, the group of people impacted was small enough that Congress didn’t feel the need to take action.
Having spoken with many readers of this site who have joint consolidation loans, I know that many of you reached out to your elected representatives demanding action. These calls put this issue on their radar.
Now borrowers just need to wait for the Department of Education to finally make the Separation Application available.