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Consolidation Undo: Seperating Parent PLUS Loans from Consolidated Loans

Some consolidation mistakes limit repayment plan and forgiveness options. Borrowers who got bad advice from servicers deserve help.

Written By: Michael P. Lux, Esq.


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Consolidating Parent PLUS loans with other federal student loans is arguably the biggest mistake a borrower can make.

This particular mistake is so severe because it is permanent. There isn’t a mechanism currently available for borrowers to undo this consolidation.

There should be.

More importantly, there can be — if the government is sufficiently motivated to make it happen.

The Need to Separate Parent PLUS Loans from Other Consolidated Loans

The problem with combining Parent PLUS loans with other federal student loans in a single consolidation loan boils down to eligibility.

Most federal loans are eligible for a range of income-driven repayment plans, including the new SAVE plan. Monthly payments can be as little as 5% of a borrower’s discretionary income, and forgiveness can take as little as 10 years.

The only income-driven repayment plan for Parent PLUS loans is the ICR plan. On ICR, forgiveness takes 25 years, and borrowers must pay 20% of their discretionary income. Making matters worse, the discretionary income definition is different for the ICR plan, meaning a larger portion of a borrower’s income is subject to student loan payments.

When a Parent PLUS loan gets added to a consolidation loan, it acts as a poison pill. The entire consolidated loan loses eligibility to all of the income-driven repayment plans except ICR. This means larger payments each month and a longer wait until forgiveness.

The Need to Undo Federal Consolidated Loans

Outside of taking advantage of a temporary loophole or utilizing the one-time IDR Count Adjustment to fast-track forgiveness, borrowers shouldn’t be combining their Parent PLUS loans with their other federal loans.

Unfortunately, it still happens all the time.

In many cases, it is a student loan servicing issue. Sometimes, borrowers make this mistake on their own. Other times, they make the mistake under the guidance of their servicer. Either way, there should be protections in place to prevent this mistake from happening.

The Blueprint to Unconsolidate Loans

For decades, a consolidated loan was final. It is a new loan; it paid off the old loans in full, and there was no going back.

Recently, legislation was passed to allow spouses to separate Federal Joint Consolidation loans. Though Joint Consolidation loans haven’t been available for years, many couples were stuck with limited repayment options for massive loans. The fix for Joint Consolidation is complicated,q and implementing it has taken a lot of time.

Nonetheless, a process is being created. What was once a large consolidated loan can soon become separate student loans.

When the Joint Consolidation Separation process is finalized, it could serve as a blueprint for separating Parent PLUS Loans from other loans in federal direct consolidation loans.

Hope for Borrowers with Parent PLUS Loans Looking to Separate Their Consolidation Loan

There appears to be an understanding with many in the federal government that student loan servicers have sometimes failed borrowers.

To correct these failures, government programs have been created to assist borrowers who may have been negatively impacted. For example, the Limited Waiver on PSLF helped borrowers who might have received inaccurate guidance about the Public Service Loan Forgiveness Program. Likewise, the one-time IDR Count Adjustment allows borrowers who were directed to deferments, forbearances, and balance-based repayment plans when they would have been better off signing up for an income-driven repayment plan.

If the government becomes aware of the severity of the Parent PLUS loan consolidation issue, they might finally take action to help this group of borrowers.

Sherpa Thought: My focus today has been to advocate for a pathway for borrowers to consolidate or separate their consolidation loans.

Another fix for this particular Parent PLUS loan issue would be to make Parent PLUS loans eligible for the SAVE plan. Thus far, the Department of Education has refused to expand SAVE eligibility to Parent PLUS loans.

The Necessity of Borrower Action

Policymakers are often pretty far removed from the day-to-day experiences of borrowers.

Many don’t fully understand student loan policy or how borrowers have been negatively impacted by the servicers contracted by the government to help borrowers.

The key to getting this problem fixed is to shine a spotlight on the issue.

Impacted borrowers can take three steps to make it known that they are unfairly stuck with Parent PLUS loans in a consolidated loan.

I’d encourage borrowers to do all of the following:

  • File a Complaint with the CFPB. The Consumer Financial Protection Bureau does a great job of tracking and documenting borrower issues. Past borrower complaints to the CFBP have led to lawsuits against servicers and policy changes. Filing a complaint with the CFPB is an easy process for borrowers.
  • File a Complaint with the Department of Education. If you want the Department of Education to fix a problem, they must know it exists. The more people who leave a complaint with the Department of Education, the more severe the problem will appear to be and the more likely it is that the government will take action.
  • Call and Email Members of Congress. Student loans have become a politically charged topic, but the Joint Consolidation Separation Act is a good example of how Congress can fix a problem when needed. Here again, the more calls and complaints that elected officials receive, the more likely they will be to act.

If you endure in silence, unnecessarily paying extra each month, things may never change.

About the Author

Student loan expert Michael Lux is a licensed attorney and the founder of The Student Loan Sherpa. He has helped borrowers navigate life with student debt since 2013.

Insight from Michael has been featured in US News & World Report, Forbes, The Wall Street Journal, and numerous other online and print publications.

Michael is available for speaking engagements and to respond to press inquiries.

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