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STUDENT LOANS ARE a hot topic—one that’s fraught with confusion and complexity. Still, many borrowers should consider taking action this year. Want to get a better handle on what’s happening? Let’s start with three changes that have lately been in the spotlight:
Not included in the list is arguably the biggest policy update for student loans to date, dubbed simply the “account adjustment.” How did account adjustment come about? As I see it, it’s largely due to a lack of clear communication in the past by the Department of Education.
For borrowers to benefit from federal student loan forgiveness programs, there are numerous rules that need to be followed. The Department of Education is making a one-time adjustment to borrowers’ accounts to compensate for historical inaccuracies and poor communication about the forgiveness programs—and the result is many borrowers are now closer to achieving forgiveness.
There are many federal student loan forgiveness programs, but my focus today is on income-driven repayment (IDR) forgiveness. This is achieved by being on an IDR plan for 20 or 25 years, depending on the plan. What determines loan forgiveness? You need to focus on the type of loan and on the repayment plan.
Loan type. When I talk about student loans, I’m talking about federal student loans. Private student loans don’t offer the array of repayment plans I’m discussing in this article.
There are two major categories of federal loans: FFEL, which stands for Family Federal Education Loans, and so-called direct loans.
The FFEL loan program is the old loan program. It ended in mid-2010. Now, all federal loans that are distributed are direct loans. The difference here is that the majority of FFEL loans are technically private loans that are backed by the federal government. Some of these loans count as federal loans, but they’re in the minority. The downside of FFEL loans is that they have access to limited repayment options, and they miss out on some of the federal benefits since they’re held by private lenders.
Meanwhile, all direct loans are federally distributed loans. Borrowers have access to all the different repayment programs, and they get all of the federal benefits. You can convert FFEL loans to direct loans with a loan consolidation through the Department of Education.
To be clear, consolidating your loans is different from refinancing. Consolidating loans combines all of your federal or federally backed loans into one loan. That loan continues to be held by the federal government and has the weighted average interest rate of all the loans consolidated, so it doesn’t change the size or interest rate of the underlying loans (though the rate is rounded up to the nearest one-eighth percent, so your interest rate may increase a little bit). Consolidating leaves your loans eligible for all federal repayment plans and forgiveness programs. In fact, by creating a direct consolidation loan, you gain access to repayment programs that aren’t available to FFEL borrowers.
Consolidating creates a brand-new loan, and typically the payment history on the underlying loans resets. But with the account adjustment, this isn’t true for this year. If a consolidation is initiated prior to the end of 2023, the loans keep their history prior to consolidation. On top of that, if you consolidate in 2023, the longest history on any of the loans will apply to the new consolidated loan. As you’ll see in a moment, this is hugely important to a loan’s potential forgiveness.
Repayment plan. Generally, the Department of Education will only forgive loans if you’ve been on an income-driven repayment (IDR) plan. For many borrowers, if their income is low relative to their student loan balance, these plans offer a way to get out of debt without having to pay off their loans in full. If you’re in this situation—low income relative to your debt balance—you may see your loan balance grow over the years. Still, if you make your income-based payments under an IDR for 20 or 25 years, depending on the payment program, whatever balance is remaining will be forgiven.
What if you aren’t on an income-driven repayment plan? Until recently, your loans wouldn’t get forgiven, even if you’ve had them for 20 or 25 years. Many borrowers have been paying on their loans for decades, only to find their loan balance hasn’t budged much, and they have no credit toward forgiveness.
With the new account adjustment, everybody will get credit toward the 20 to 25 years, even if they weren’t on an income-driven repayment plan. Credit will also be given for certain times of forbearance or deferment. In other words, even if you weren’t making payments on your loans, you may still get credit for that time. All this only applies to the past. Starting in 2024, you need to be on an income-driven repayment plan to continue accruing credit toward forgiveness.
How powerful is this account adjustment? Let’s go through an example. Suppose a borrower started repaying her FFEL loans in 1999, loans that should have been paid off after 25 years, assuming regular payments.
Unfortunately, our borrower went through some tough times, and had to pause payments intermittently by going into forbearance. By being in forbearance, she didn’t have to make payments, but interest continued to accrue on the loan. Now, 24 years later, she has a balance larger than when she started, plus she has no credit toward forgiveness because she hasn’t been on an income-driven repayment plan.
But our hypothetical borrower learns about the account adjustment. She decides to consolidate her FFEL loans into a direct consolidation loan, which gives her access to lower payments based on her income. In addition, she gets credit toward forgiveness for the past 24 years and will only have to make payments for one more year—to make it to 25 years—before her full loan balance gets forgiven.
Let’s take this example one step further: Our borrower has children and she borrowed for her children’s undergraduate schooling during 2018-22, taking out an extra $200,000 of Parent Plus Direct Loans (the direct loan program for parents to borrow for children). If our borrower consolidates her old loans taken out in 1999 with these new loans, she could—thanks to account adjustment—get credit for the length of the oldest of these loans. The upshot: Even though the borrower would otherwise need to make 25 years of payments on her children’s debt starting in 2022, with a forgiveness date of 2047, she could get all this debt forgiven next year.
The above examples are pretty extreme. Still, account adjustment can benefit hundreds of thousands, if not millions, of borrowers. But be warned: This isn’t a slam dunk for everybody. There can be negative consequences to consolidating. Borrowers must weigh all the pros and cons before making these decisions, which are irrevocable. There are many variables involved, so I can’t offer blanket recommendations, except this one: For those who still have student loans outstanding, consider speaking with a qualified professional before the end of this year to find out whether there are any steps you should take.
Logan Murray is a solo financial advisor. His company Pocket Project offers subscription-based financial planning services to young professionals. He’s also a consultant for StudentLoanPlanner.com, which helps borrowers make a plan for their student loans. For more financial insights, check out Logan’s blog, connect with him on LinkedIn and check out his earlier articles.
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It blew my mind to discover my federal family education loans aren’t really federal loans, not that it ended up mattering much..
This topic came up with a co-worker today, and I was able to recommend your article. Good job, Logan.
Thanks for making a complex topic a little more clear, while emphasizing that it’s still complex, with no “one size fits all” solution.
Logan, thanks for a great article. You say “speak with a qualified professional.” How does a person find a qualified professional? (Asking for my daughter.)
Thanks for reading Larry! The gold standard for loan planning is the CSLP or Certified Student Loan Planner. You can search for one here: The Certified Student Loan Advisor – CSLP who can help you (cslainstitute.org)
Although looks like I haven’t even put myself on there, ha! Feel free to send me an email through my site too.
Thank you!
Thank you for such an informative article. I no longer have student loans, but have a close friend who is truly burdened with them.