By the time President Biden unveiled plans to forgive up to $20,000 in student loans last week, Price, 57, was $5,600 in debt left — less than a quarter of what it originally borrowed. Biden’s plan would easily wipe out his balance.
“I celebrated,” said Price, a writer in Sarasota, Florida. That is until she viewed her loans on studentaid.gov, where Price learned she had a type of federal debt held by private companies that were not eligible for forgiveness.
“I was really disappointed,” Price said. “I kept checking Twitter to see if there were any options for someone like me.”
Some Federal Student Loan Borrowers Excluded From Bailout Consider Risky Move To Get Relief
Millions of borrowers have been excluded from debt relief policies because their federal loans, from the now defunct Federal Family Education Loans (FFEL) program, are held by private entities.
But borrowers with these business-held FFEL loans can consolidate their debt into the Direct Lending Program — where loans are made and held directly by the federal government. — become eligible for forgiveness.
Since the President’s announcement, there has been a spike in consolidations among FFEL commercial borrowers. Although Biden’s plan applies to loans made on or before June 30, consolidation loans disbursed after that date are still covered as long as the underlying debt was issued on or before June 30, according to the ministry. education.
Q&A on Biden’s Student Loan Forgiveness Plan
The department said it would work with private lenders to ensure federal borrowers held in commercial businesses can benefit from the cancellation plan. Borrowers, according to the ministry, will have more than a year to apply once the application becomes available this fall and will have nothing to do now.
Apart from the cancellation plan and payment pause, the consolidation would also make FFEL commercial borrowers eligible for the Income Repayment Account Adjustment (IDR), which provides one-time retroactive credit for loan forgiveness. It would also allow borrowers to take advantage of a temporary extension of the Civil Service Loan Cancellation Program (PSLF).
But there are compromises.
Any unfunded interest on the loan is added to the balance, increasing the total amount owed. Consolidation could also result in a higher interest rate. And for people enrolled in an income-driven repayment plan, consolidation would typically mean losing credit for payments made toward debt cancellation. However, adjusting payments to income largely negates this last concern.
“People feel like they have to do something now or they’re going to miss the opportunity,” said Betsy Mayotte, president of the nonprofit Institute of Student Loan Counselors. But “anyone who is not a candidate for the PSLF or will not have a zero balance with the IDR waiver or [Biden’s] forgiveness plan could face real harm” by consolidating.
Price took all the consequences into consideration before asking for a consolidation. She had less than $200 in outstanding interest and a relatively low balance, so the rewards far outweighed the risks, she said.
After graduating from Georgetown University, Price postponed his loan repayment several times amid bouts of unemployment, caring for her dying father, and a job that paid just enough to cover her living expenses.
“It’s not a lot of money,” Price said of his student loans, “but it’s a burden I’ve carried for 30 years, and it’s still hanging around at 8% interest.”
Mark Grimaldi, 39, also considered the risks of consolidating the remaining $10,600 on loans he needed to attend Syracuse University. The move would increase his debt to $13,200, but as a former Pell Grant recipient, he would be eligible for cancellation of the entire amount.
Still, he feared that apart from news reports, there was no confirmation on the Ministry of Education website. that borrowers like him could consolidate to be eligible for cancellation.
“It’s not something I took lightly,” said Buffalo radio producer and father of two Grimaldi. “I mean, if I made the wrong decision, I would only cost my family a few thousand dollars. But if I did nothing, we would have to pay three times as much.
Like Price, Grimaldi knew he had taken out federal loans, so how did they end up in the hands of private companies? It’s a bit of a coincidence rooted in the design of the FFEL program.
For years, the federal government has essentially been a silent partner in a $60 billion program. Private lenders used their own money to fund the loans, but behind the scenes the government paid some of the interest to make the debt more affordable. The government guaranteed the debt, assuming the risk of default as a means of attracting lenders. But after lenders were caught robbing the government and paying financial aid officers, the FFEL program fell out of favor on Capitol Hill.
When the 2008 recession threatened the liquidity of private lenders, the Department of Education stepped in to buy some of the FFEL loans to keep the program running. By the time the Obama administration shifted to direct lending only in 2010, the bank loan portfolio had been split between the department and companies like Navient and Nelnet. Debt held by the Ministry of Education is eligible for relief.
Consolidation is not an option for every borrower with a commercially held FFEL loan. People with FFEL spousal consolidation loans, which made couples jointly and severally liable for their student debt, are barred from consolidation. Individuals who have already consolidated their commercial loans are generally prohibited from doing so again, but can consolidate to access a benefit such as the public service waiver, Mayotte said.