(Nerdwallet) – Six million federal student loan borrowers cannot benefit from the payment break in progress – the one that could give most people in debt 19 months of relief if it is not extended after October 1.
These unlucky borrowers have commercially held Federal Family Studies Loan Program debt or Perkins loans held by their schools.
FFEL is an old loan program that ended in 2010. Although the standard repayment plan is for 10 years, there is still a lot of debt because borrowers have defaulted, chained abstentions, or used repayment plans. based on income that extend payments for up to 20 or 25 years. .
It’s not just the 0% interest break that commercially owned FFEL borrowers are missing. They cannot benefit either:
- The current moratorium on forced collections, including wage garnishments and tax refund or seizure of Social Security payment. Federal data shows that FFEL guarantee agencies collected nearly $ 270 million in wage garnishments from January 2020 to September 2020.
- Nineteen months of non-payments toward eligibility for utility loan forgiveness (which FFEL borrowers are not eligible for) or income-tested forgiveness.
“These borrowers are having a hard time doing it,” says Persis Yu, lawyer and director of the National Consumer Law Center’s Student Loan Assistance Project.
Here is why some FFEL borrowers do not receive relief and what they can do to meet their loan debt.
Many FFEL loans are private
FFEL program loans were funded by private and state lenders and guaranteed by the federal government. This meant that if a borrower defaults or has their debt canceled, the federal government will pay companies an interest rate subsidy to make up for the loss.
During the 2008 recession, the Department of Education purchased FFEL wallets to support struggling lenders. Borrowers had no say in the inclusion of their loans.
This purchase divided FFEL loans into two groups: held by the Ministry of Education and held commercially. The latter remain in private portfolios held by private companies. To make the distinction more opaque, some of these companies – like Navient and MOHELA – also manage direct loans and FFEL federal debt.
It’s not just confusing. Borrowers with government owned loans get relief. Those who have bank loans do not.
And the only lifeline available to borrowers with off-the-shelf loans, consolidation, is not accessible to all FFEL borrowers. Consolidation allows borrowers to convert their debt into a direct federal loan eligible for current relief efforts.
Not all FFEL borrowers can consolidate into direct loans
Consolidating into a direct loan can give FFEL borrowers access to the payment break, any existing federal student loan cancellation programs like the PSLF, and any possible future debt forgiveness.
But not all borrowers with commercially owned FFEL debt can consolidate, such as those with spousal consolidation loans or legal action against them for their debt.
A spouse consolidation loan prevents Michael Walcom and his wife from consolidating into a direct loan. The Boise, Idaho couple consolidated their debt in 2003 and are currently paying just under $ 450 per month on their remaining debt of $ 36,000.
Their only income comes from Walcom, a former National Guard member who has worked as a federal employee since 2006. He now drives 60 miles a day from their 384 square foot cabin to work as an administrative clerk for the US Forest Service.
” I do not know what to do. Right now we’re barely doing it – there’s no room for maneuver, ”Walcom says. “It’s survivable, but it’s frustrating.”
Lawyers argue that lawmakers must allow those who have already consolidated FFEL debt to do so again.
“We need a way forward for borrowers to get a direct loan for the purpose of the payment break that doesn’t hurt them in the process and puts them in place for parity with all other student loan borrowers. federal, ”says Seth Frotman, executive director of the Center for Student Loan Protection.
Consolidation can have unintended consequences
Consolidation is not always the right decision for FFEL borrowers. Here’s why:
- You will lose the progress towards the income-based reimbursement discount. If you are already making payments on an IBR plan and converting your loans to a direct program, you will lose all credit for previous payments.
- You could pay more on the interest already accrued. Any unpaid interest on outstanding loans will be capitalized and added to your principal upon consolidation.
- Your consolidated interest rate may be higher. Consolidation weighs the average of existing interest rates and rounds to the nearest eighth of a percent, so you could end up with a higher rate on some of your debt.
Some options to help FFEL borrowers
The commercially-held FFEL borrowers weren’t included in any of the COVID-19 relief programs, and they’re unlikely to get help anytime soon.
“They need to prepare for the situation as it is,” Yu said. “I hope lawmakers are looking for ways to find relief for these borrowers, but from the borrower’s perspective, they need to be prepared. in the worst case.”
Here are the options available to FFEL borrowers in difficulty:
- Contact your agent regarding interest related to COVID-19 relief or suspension of payments.
- Request a postponement of unemployment, a postponement for economic difficulties or an abstention. Interest will continue to run.
- If you are eligible, consolidate your FFEL or Perkins loans into a new federal direct loan to access the payment break.
- If you are past due or in default, consolidate your debt into a direct loan to get it back on track. If you can’t consolidate, talk to your loan reclamation service agent.
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Anna Helhoski writes for NerdWallet. Email: [email protected] Twitter: @AnnaHelhoski.
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