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.
Qualifying for Biden Loan Forgiveness
One of the first questions that many borrowers will have is whether or not this legislation impacts their ability to get the $10,000 or $20,000 of Biden Student Loan Forgiveness.
As it stands right now, it is an open question whether or not existing joint consolidation loans are eligible.
However, separated spousal loans are classified as federal direct consolidation loans, and those loans are eligible. Thus, it may be necessary to separate spousal loans to get Biden forgiveness, but we don’t know at this point.
The other issue is the waiting. Once President Biden signs the bill, the Department of Education must implement it. They have to iron out all of the details in accordance with the legislation and provide instructions to servicers. No timeline has been released at this point.
Borrowers with joint consolidation loans will want to keep a close eye on any new developments. The application to separate could become available quickly, or it might take months.
In the likely event that separating the combined loan is necessary for $10,000 of forgiveness for each borrower, couples will want to get the debt separated before the December 31, 2023, Biden forgiveness deadline.
Sherpa Thought: If you have a joint consolidation FFEL loan, I’d expect that the debt will eventually qualify for the Biden forgiveness program. However, jumping through a couple of hoops will likely be necessary.
Right now, we are in the waiting game. Once the Department of Education answers the eligibility questions and releases a separation application, borrowers can take action.
The PSLF Limited Waiver and Other Temporary Programs
The separation timeline becomes very important if you have a Joint Consolidation Loan and want to take advantage of the Limited Waiver on PSLF or the IDR Count Update.
The most pressing deadline is the October 31, 2022, deadline for the Limited Waiver on PSLF. This waiver allows borrowers to count previous progress towards PSLF from before their loans were consolidated. Missing out on this waiver means that borrowers start from scratch after separating their loans.
Because the Joint Consolidation Loan Separation Act passed so close in time to the limited waiver deadline, many couples may miss out. In fact, all couples with FFEL Joint Consolidation Loans may miss out on the limited waiver perks.
Here again, we are waiting on the Department of Education for complete details.
Limited Waiver Strategy: Right now, there is a small window of opportunity for borrowers with FFEL Joint Consolidation Loans. It is certainly possible that actions taken in the next couple of weeks won’t ultimately help. However, a couple of sharp moves today could make a difference in the future.
For now, borrowers with FFEL Joint Consolidation Loans can submit two crucial applications. First, they can apply for federal direct consolidation. This application will certainly get rejected. Likewise, they can send in a PSLF application.
The point of these applications isn’t to get approved. The point is to apply so that you meet the deadlines for the Limited Waiver on PSLF. Once you separate the joint loan, you can point back to these applications as proof that you met the October 31, 2022 deadline.
I wouldn’t bet on this strategy working. However, it could be enough to cut through the red tape once your loans are separated.
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.
Today is a day to celebrate the actions of ordinary Americans, many of whom reached out to Congress for the first time. You did it!
The days of Joint Consolidation Loans getting ignored are coming to an end.
Any update on the application release? I somehow got into this some 20 years ago when I had maybe $7000 to my ex’s $150,000+. Loan forgiveness was always the goal so I have no idea how we got into this. Per our divorce, he was to get me off of these loans “in a timely manner”. Years, on top of my efforts to push this legislation, and he still won’t do it. He holds this over me for reasons unknown and has every excuse not to file. I need help. This attachment is killing my credit let alone messes with my head! This is not my debt!
Unfortunately, there are no updates to report yet. The bill passed, so the application is definitely coming, but the Department of Education is moving very slowly these days, so we have no idea when it will happen.
I also made the mistake of consolidating loans, even though my parents paid for almost all of my education. Now I am 46 years old, divorced from the man I consolidated with and still paying on the loans… best of all, I work for a non profit!!! Every time I try to qualify for any forgiveness, I get denied because of the consolidation. I only borrowed less than $2000 and still owe $23, 000 due to the consolidation. I just want to be done with them. When will with application be available?
Unfortunately, I have no idea when it will be released. This is the sort of thing they will just announce once it is ready. I’ll update this article once it becomes available.
I thought I was making a wise decision when I consolidated my wife and my student loans. Why does it now seem that we get punished for that decision? We have worked for educational institutions and would have qualified for PSLF had we not consolidated our loans. Now, I may be finally able to separate them, but none of the 15 years worth of payments I made will count toward the 10 years of qualifying payments. Who can I write to to complain? I want to make noise about this. This is unfair.
You definitely got a raw deal, Alan. Based on the information that was available at the time you did the joint consolidation, it was a justifiable choice. Over the years, changes to the rules penalized you more and more.
This is one of those cases where writing to your elected representatives can make a difference. I’d also suggest filing a complaint with the Department of Education too. I’ve found that many elected leaders don’t really understand the intricacies of the student loan system. When a constituent highlights an issue, it can lead to a fix.
Nelnet says I am not able to consolidate into the Federal Direct Consolidation Loan, because in July 2010 the Spousal Consolidated loans ALL became “commercially-held” FFEL loans. Is this true? The Nelnet person said that mine are now “commercially-held” FFELP loans and would not be helped by the Joint Consolidation Loan Separation Act – only the Fed held ones can get relief. Is this true? I don’t have any idea why they think the loan is commercially-held, I never went to a bank.
That doesn’t sound right. It sounds like there is some mixed information about a couple of different programs happening.
Let me try to untangle things for you.
First, all spousal consolidation loans are not necessarily FFEL loans. Some of them are direct loans, some of them are FFEL loans. What did happen in 2010 is that the program was discontinued, and the headaches for borrowers with these loans really started.
As for the Joint Consolidation Loan Seperation Act, the bill was just signed. It has not been implemented yet. At this point, servicers are still waiting for directions from the Department of Education. With everything happening right now with student loans, it may be a bit of time before the separation opportunities start.
(Side Note: the idea that all spousal loans are FFEL and the joint consolidation act doesn’t apply to FFEL loans doesn’t make sense. Why would they pass a bill that applies to zero borrowers?)
Finally, I think part of the information you are getting is details about the one-time Biden Forgiveness program. This is the $10,000 or $20,000 of forgiveness that has been in the news. Spousal loans currently do not benefit. Likewise, FFEL loans do not currently benefit. (I’m hopeful that both things eventually change.)
im in one of these… since 2009. got a divorce and got my life back on track. been the only one responsible and paying the payments. now I can only hope to get this mess untangled by separating my portion out so it will hopefully be forgiven either under PSLF or the IDR. heck, I’ll be happy just having them separated.
My spouse and I signed up for a spousal consolidation loan when they were still doing them due to financial reasons. My spouse passed away in 2012 and I am not able to apply for a direct loan to qualify for PSLF. I have applied numerous times and have been denied due to having a spousal loan. Even with him passing away, I am not able to qualify for a direct consolidation loan as he signed the original paperwork. I hope this new Act passes so I can finally get some help and it will apply to me as well for my situation. Any other suggestions you have?
This legislation should help your situation. I don’t have any suggestions beyond what is listed in the article.