Borrowers are currently navigating a complex web of new, temporary student loan forgiveness initiatives launched by the Biden administration in recent months. Each of these loan forgiveness programs have unique eligibility rules and application procedures. In some cases, borrowers may have to consolidate their student loans through a federal Direct consolidation program to qualify. But not always.
Here’s a breakdown.
The Role of Loan Consolidation in Student Loan Forgiveness Initiatives
Up until 2010, there were two parallel federal student loan programs:
- Direct loans, which are federal student loans that are originated and held by the government (the U.S. Department of Education).
- FFELP loans, which stands for the Family Federal Education Loan Program. FFELP loans are an older federal loan program whereby loans were originated and held by private, commercial lenders, but could subsequently be assigned or transferred to the U.S. Department of Education in certain cases. The FFEL program was discontinued in 2010, but there are still many FFELP loans in circulation.
Borrowers can, in many cases, consolidate existing federal student loans (including Direct loans and FFELP loans) into a new federal Direct consolidation loan. This can sometimes have benefits, such as simplifying repayment and loan management, and opening up new repayment and forgiveness options. For loan forgiveness programs that are limited to certain kinds of loans, such as Direct loans or government-held federal loans, Direct loan consolidation can effectively convert non-qualifying loans into a qualifying loan.
Direct loan consolidation can also have some downsides, however. Consolidation can result in the capitalization of accrued interest. And while consolidation generally results in a weighted-average interest rate based on the rates of the underlying loans that are being consolidated, borrowers may lose incentive-based interest rate reductions by consolidating.
Historically, Direct loan consolidation would erase past progress towards student loan forgiveness under several key federal programs, such as Public Service Loan Forgiveness and Income-Driven Repayment. But under temporary initiatives by the Biden administration, this may not be the case, at least while the applicable temporary relief programs remain active. And in some cases, Direct loan consolidation is the only way to receive relief under these initiatives.
Here’s how Direct loan consolidation fits in to three key federal student loan forgiveness initiatives.
Consolidation of FFELP Loans for Biden’s One-Time Student Loan Forgiveness Plan
Under President Biden’s recently-announced one-time student loan cancellation plan, millions of federal student loan borrowers may be eligible for $10,000 or more in federal student loan forgiveness. Eligible borrowers must have earned less than $125,000 (or less than $250,000 if they are married) in either 2020 or 2021 to qualify for loan forgiveness.
The Education Department has indicated that government-held federal student loans will qualify for this student loan forgiveness initiative. “Government-held” federal student loans include all Direct loans, as well some FFELP loans that are held or administered by the U.S. Department of Education. FFELP loans that are in default will also qualify for relief under this initiative, whether they are held by the Education Department or by a private or state-affiliated guaranty agency.
But FFELP loans that are in good standing and commercially-held do not qualify for this relief. The Education Department had originally indicated that these borrowers could consolidate FFELP loans into a federal Direct consolidation loan to become eligible. However, in response to new litigation seeking to block the program, the Biden administration reversed course, and as of September 29, 2022, borrowers with commercially FFELP loans cannot qualify for student loan forgiveness through Direct loan consolidation.
However, according to Education Department guidance, “Borrowers with FFEL Program loans… not held by [the Education Department] who have applied to consolidate into the Direct Loan program prior to Sept. 29, 2022, are eligible” for this loan forgiveness program.
Consolidation for Student Loan Forgiveness Under the PSLF Waiver
Last year, the Biden administration launched the Limited PSLF Waiver — a temporary program that can provide sweeping retroactive flexibilities for borrowers seeking student loan forgiveness through the Public Service Loan Forgiveness (PSLF) program. Under the Limited PSLF Waiver, past periods of repayment, and some past periods of deferment and forbearance, can be counted towards the 120 “qualifying payments” a borrower must make to receive loan forgiveness under the program (there are employment requirements that must be met, as well). The Limited PSLF Waiver is set to end on October 31, however — which is in just a couple of weeks.
Only Direct federal student loans qualify for the Limited PSLF Waiver. FFELP loans (whether they are commercially-held or government-held) do not qualify unless those loans are consolidated into a federal Direct consolidation loan. Under the original PSLF rules, past payments on FFELP loans prior to Direct loan consolidation would not count. But under the Limited PSLF Waiver, they can.
Borrowers with FFELP loans who qualify for relief under the Limited PSLF Waiver should “Consolidate your FFEL Program loans… into a Direct Consolidation Loan by Oct. 31, 2022. You can’t receive credit for time in repayment if you don’t consolidate and submit your PSLF [employment certification] form by that date,” says the Education Department.
Even Direct federal student loan borrowers could benefit from Direct loan consolidation under the Limited PSLF Waiver, at least in some cases. In the past, consolidating Direct loans that already had PSLF credit would result in erasure of the past PSLF credit, effectively restarting the clock. But under the Limited PSLF waiver, the Education Department says that for borrowers who have individual Direct loans with different repayment histories and, thus, different PSLF payment counts, “Under the time-limited PSLF rule changes, your consolidation loan will receive credit for time in repayment on your loans with different counts. Your consolidation loan will be credited with at least the largest number of payments on the loans that were consolidated.”
While the consolidation process can take a month or two to go through, the Education Department says “your consolidation application must be submitted online through StudentAid.gov by 11:59 p.m., Eastern time on Oct. 31, 2022, in order for you to receive the benefits of the limited PSLF waiver,” regardless of the processing time on the Education Department’s end. Borrowers must also complete and submit the required PSLF Employment Certification forms by the deadline, as well.
Consolidation for Student Loan Forgiveness Under the IDR Account Adjustment
Earlier this year, the Biden administration announced the IDR Account Adjustment initiative, which — similarly to the Limited PSLF Waiver — can provide sweeping retroactive credit for certain previous repayment, deferment, and forbearance periods that can be applied towards a borrower’s 20 or 25-year loan forgiveness term under Income-Driven Repayment (IDR) plans.
According to the Education Department, “Any borrower with loans that have accumulated time in repayment of at least 20 or 25 years will see automatic forgiveness, even if you are not currently on an IDR plan.” Other borrowers may receive substantial credit that can accelerate their progress towards eventual loan forgiveness.
All government-held federal student loans will qualify automatically for the IDR Account Adjustment. This includes all Direct federal student loan, as well as FFELP loans that are held by the Education Department.
Commercially-held FFELP loans can qualify for the IDR Account Adjustment it they are consolidated into a federal Direct consolidation loan, says the Education Department. “If you have commercially held FFEL loans, you can only benefit from the IDR account adjustment if you consolidate before we complete implementation of these changes,” says the administation in published guidance. Current guidance indicates that the Education Department expects implementation to begin this fall and be completed “no sooner than” January 1, 2023; however, officials have indicated that this initiative will likely be delayed, and implementation pushed out further into 2023, possibly to the summer.
The Education Department has released minimal guidance on the IDR Account Adjustment, although further updates are expected in the coming months.
Resources for Borrowers Considering Consolidation to Access Student Loan Forgiveness Programs
If you are considering Direct loan consolidation to access or maximize potential loan forgiveness, borrowers should first review important Education Department resources:
- Education Department’s overview of Direct loan consolidation
- Online Direct loan consolidation application portal
- Overview of Biden’s one-time student loan forgiveness plan
- Overview of the Limited PSLF Waiver
- Overview of the IDR Account Adjustment