Here is Why Spousal Consolidation Loans Are Such a Freaking Mess

Question:

Dear Steve,

I currently have two FFEL Spousal Consolidation Loans that are administered by Navient. My ex-wife and I consolidated our loans back in 2003 when we were married. We are now divorced. Also, There used to be four loans all together. My ex-wife’s two loans were recently discharged due to disability.

It is my understanding that, with FFEL spousal consolidation loans, both my ex-wife and I are responsible for them even though my ex-wife’s loans were discharged. Note: My ex-wifes disability discharge for her portion of the Spousal Consolidation loan was granted back in November 2015. There is a probationary period of 2-3 years before someone with a disability can be granted the student loan discharge. My ex-wife has advised me that her probationary end date is 10.15.17.

Whenever I go to apply for a reduced monthly payment plan (like the Income Based Repayment IBR plan) for the student loan, my ex-wife needs to request it as well. I am now re-married. Just recently, I went to apply for an IBR plan. I am required to submit my financial information as well as my current wife’s information. My ex-wife must submit her financial information as well. I was told that there isn’t any way to avoid my ex-wife having to submit information for the request because of the special nature of the spousal consolidation loan that we have. It doesn’t matter that we are now divorced and her loans have been discharged. She is equally responsible for the remaining loans (my loans).

My first question is regarding applying for a Direct Consolidation Loan. Can I consolidate my two existing/remaining FFEL Spousal Consolidation Loans into a new Direct Consolidation Loan? If I can and if I do decide to consolidate them, would I be the only one responsible for the new Direct loan? Since my ex-wife’s loans have been discharged and the only two loans remaining on the existing spousal consolidation loan are mine, I would think that this would not be a problem. My main goal in consolidating my loans into a direct is to make me be the sole responsible party for them.

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My second question is that if I cannot obtain a Direct Consolidation Loan and my ex-wife must remain on the current spousal consolidation loan it looks as though I/we do not qualify for the Income Based repayment or other programs that would help reduce the monthly payment because my now current wife and I make too much money. The current student loan balance is $24,947. The current monthly payment is over $500. This is a very high monthly payment to be making every month. I just received my Chapter 7 Bankruptcy discharge in October 2016. The student loan was not part of the bankruptcy because I was told that they were not dischargeable in a bankruptcy. Should the student loan have been included? Does this certain situation regarding the spousal consolidation loan make it dischargeable in a bankruptcy? If it does, should I look at amending my bankruptcy case to include the student loan?

Don

Answer:

Dear Don,

Spousal Consolidation Loans (SCL) are without a doubt, one of the most messed up and screwed up student loan types.

Essentially what happened was the Department of Education used to allow Spousal Consolidation Loans and then decided it was a bad idea. But when they stopped making them they provided zero exit for those that had fallen for the sales pitch.

According to the Department of Education “both borrowers are jointly liable for the loan for the life of the loan. Neither of those individuals can undertake a new FFEL obligation that resolves the debt of the other.” – Source

And as you’ve painfully discovered, it gets even more insane with a Spousal Consolidation Loan:

  • Deferment – In order to qualify for a deferment both borrowers must individually and simultaneously qualify for the same type of deferment.
  • Disability – When spouses combine their debt in a spousal consolidation loan and if one spouse becomes totally and permanently disabled, the portion of the loan attributable to that borrower can be discharged. However, both spouses remain jointly and severally liable for the remaining consolidation loan balance.
  • Death – With a spousal consolidation, the portion of the loan attributable to the deceased spouse can be discharged. However, the surviving spouse remains liable for the remaining consolidation loan balance.
  • Divorce – In the event that the spouses divorce, each spouse is still mutually responsible for repayment of the spousal consolidation loan.
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There is literally no exit door from these loans. That is truly insane.

I remain of the opinion that Department of Education practice and rules differ on this issue. See this previous article with information I obtained with a Freedom of Information Act request.

Unless your old loan was consolidated into a new and different loan it would not be eligible for an income driven payment.

And you ask about the inclusion in bankruptcy. To get relief through bankruptcy your bankruptcy attorney would have to file another court action, an Adversary Proceeding. The attorney would have to make the case the repayment of this loan creates an undue hardship. People who have some life event, medical hardship, and loss of income into the future have the most hope of obtaining a full or partial discharge. You can read these posts to get a better idea of what I’m talking about.

Sincerly,
Steve

You are not alone. I'm here to help. There is no need to suffer in silence. We can get through this. Tomorrow can be better than today. Don't give up.


Damon Day - Pro Debt Coach

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