Although FFEL lending has been phased out, it continues to cause significant problems for federal loan borrowers seeking public service loan forgiveness (PSLF).
Federal Family Education Loan (FFEL) program loans that are not held by the federal government are not eligible for PSLF. However, borrowers can convert them into eligible loans through Federal Direct Consolidation.
Unfortunately, this update restarts the clock for student loan forgiveness.
Recent legislation has tried to address some of the problems with PSLF, but the FFEL problems remain. Many borrowers are hoping for a solution but are unsure how to proceed with their student loan planning.
Reader Question: Should I restart the PSLF forgiveness clock by Consolidating FFEL Loans??
The dilemma that many public sector workers face when it comes to FFEL loans is complex. A recent reader email shows this challenge:
I have worked as a social worker in a non-profit hospital for over 20 years and have been faithfully repaying my FFEL student loans since 2002. I recently learned that my payments to the Department of Education were not made as direct loans. Payments do not count towards the PSLF program.
Does it make sense to group my FFEL loans into a direct loan to apply for the PSLF program with a remaining balance of 71,000 and a payout date of 2037? Are there other “rare” or exceptional reasons I can investigate in order to request / cancel a loan?
The decision to move forward with FFEL consolidation
One of the risks of further consolidation is losing progress on income-based student loan allocation.
FFEL loans can be granted after 25 years of payment under the IBR (Income-Based Repayment) plan. Borrowers who have made years of IBR payments on their FFEL loans face a tough decision to make. If they consolidate, the IBR progress will go back to zero. If not, PSLF is impossible.
Both options involve risks:
- IBR forgiveness can be expensive. Forgiveness for IBR borrowers lasts for 25 years. At the end of the 25 years, the IRS will tax the debt issued. The tax-free forgiveness of PSLF could make a fresh start worthwhile.
- Consolidation is an obligation to PSLF. Restarting the clock is a bet on a successful PSLF application in 10 years. What if you lose your PSLF job and cannot complete the required ten years? What if your application is rejected because of another problem?
Finally, the borrowers have the full repayment option. In some cases, the most aggressive way to reduce debt may be with aggressive repayment.
When you return to our reader email, there is no straightforward answer to the consolidation question. The best that a borrower can do is to play out the different options. Think how much each strategy would cost if things went according to plan. Think about how things may not go according to plan.
One of the best tools for making decisions is the Department of Education loan simulator. The loan simulator can take into account salary changes, choice of repayment plan, and various types of forgiveness. It’s one of the most helpful resources on the Federal Student Aid website.
Another complication of this situation is the possibility of changes in the horizon. Another reader email describes the problems.
Reader’s question: Should any changes to the PSLF rules affect my decision?
My wife is a school teacher with approximately 110 of the 120 required eligible payments required for PSLF. We recently discovered that not all of their loans are eligible for PSLF as the loans are FFEL loans.
With the FFEL loans paid back 10 years ago, I see no reason to consolidate the loans as we would never reach the 120 payments required. Also, I don’t want to risk inadvertently including the current PSLF-eligible loans in the consolidation.
Since the Biden administration appears to be open to the granting of student loans, we have decided to investigate which granting of student loans could be possible through its administration. Most of the articles I’ve read believe that lending is only eligible for federal loans and not for FFEL loans.
If so, should we now consolidate their FFEL loans, wait for their PSLF loans to be granted, or not make any changes? Would the FFEL loans have to be consolidated for a period of time before they could possibly be granted under Biden’s administration? Is there any additional insight into what student loan forgiveness might look like while administering Biden? I understand that the questions about Biden’s administration loans are not really answerable, so I’m probably asking for your gut instinct.
The Ministry of Education and Fixing PSLF
The initial rejection rate of PSLF applications was over 99%. As more borrowers applied, many expected approval rates to improve. Unfortunately, the rejection rate remains well above 90%.
One solution has been to create a temporary extended public loan system. TEPSLF helps borrowers who signed up for the wrong repayment plan.
Unfortunately, TEPSLF does not help borrowers with FFEL problems.
As noted in the second reader’s email, President Biden supports student loan forgiveness in the form of $ 10,000 debt relief. In addition, he has expressed a desire to help PSLF applicants. With TEPSLF’s precedent, it is reasonable for borrowers to hope for further improvements from PSLF for FFEL borrowers.
Again, there are two avenues for borrowers, and both have risks:
- Consolidate and hope for general lending or cancellation. If there is federal debt relief, it likely only applies to federally owned student loans. Borrowers with FFEL loans may miss out on this. Direct federal consolidation could increase the likelihood of debt relief if that happens.
- Keep the loans as FFEL and hope for some specific solution. The Department of Education or Congress can contact PSLF for FFEL borrowers. Consolidated borrowers may not be eligible for new FFEL-specific relief.
Again, aggressive repayment remains a third option. Instead of hoping the government will act, borrowers who reduce their debt can save the most in the long run.
The most likely student loan changes
Over the years I have made many predictions about the most likely outcome of student loan proposals and events. The purpose behind predictions is to help borrowers plan. In this case, I think an additional relief by the federal government is unlikely, but say that this will be little certainty. FFEL-specific help and general credit cancellation are both slim options.
Borrowers should consider all options, stay up to date with news and developments, and be ready to act quickly if things change.