Department of Ed FFEL Joint Consolidation Rules Arbitrary & Punitive

Not that long ago I wrote an article, “This is One Way to Get FFEL Spousal Consolidation Loans Forgiven” in which a reader was looking for a way to deal with her previous FFEL spousal joint consolidation loan with her ex-husband.

She wanted to move forward in a positive way in dealing with her student loan debt that was originally taken out with her spouse.

The couple subsequently divorced and she is now stuck in this old FFEL spousal joint consolidation loan without apparent options to seek loan forgiveness under a program she would otherwise be eligible for.

In the article I pointed out there did not appear to be any specific regulation that would prevent the reader from seeking a new Direct Consolidation Loan since public information did not exclude a new loan to replace the old spousal loan. In fact, documentation seemed to show it would be possible.

Following the story I heard from some people who said the conventional wisdom was it was not possible. So after a Freedom of Information Act request from the Department of Education, I now have some additional information.

FFEL Consolidation Loans – Purgatory

The situation is a terrible one that the Department of Education should cleanup and clarify to create a better outcome for divorced spouses. Prior to July 1, 2006, spouses could consolidate together their individual student loan debt into a FFEL joint consolidation loan.

The problem arises when the spouses go their separate ways and have you seen our national divorce rate!

In essence, the Department of Education holds the couple hostage and effectively will not allow one spouse to accept individual responsibility for the FFEL spousal consolidation loan so they can be in control of the debt.

I completely understand how joint debts are not separated by divorce. A divorce decree is an agreement between spouses about who is going to pay what debt. If the spouse who says they will pay decides to stop paying. The creditor will go after the other joint party regardless of the divorce decree.

But if one spouse takes out a new loan and the old joint debt is paid off, it will release the other spouse and the bond can be broken.

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So in the case of the FFEL spousal consolidation loan where one person wants to take over the loan, such as in the reader example of making it eligible for the Public Service Loan Forgiveness program, the Department of Education says they can’t get a Direct Consolidation Loan to pay off the FFEL spousal consolidation Loan.

No Official Policy to Prevent This

But information released to me by the Department of Education appears to contradict this unofficial position about not letting one person consolidate a previous joint debt.

The Department of Education has told me, “There are no specific regulations or other official written policies explicitly stating that one of the borrowers of a FFEL joint consolidation loan may not individually re-consolidate that loan into a new Direct Consolidation Loan for which he or she would be solely responsible.”

They then go on to say, “However, the statutory and regulator terms and conditions that applied to joint consolidation loans don’t allow for this.” The Department of Education cites the issue of a joint debt remains a joint debt following a divorce.

But what the Department of Education does not say is there is nothing that appears to restrict one person from taking out a new loan to satisfy the old FEEL joint consolidation loan in their name alone.

Public information says, “A borrower in repayment who wishes to consolidate a FFEL with other federal education loans (no Direct Loans) and has been unable to obtain a Federal Consolidation Loan is eligible for a Direct Consolidation Loan.” – Source

So if one spouse would be ineligible for rolling a FFEL joint consolidation loan into an individual FFEL consolidation loan, would they not be eligible for a new Direct Consolidation Loan? It appears they would.

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Direct Consolidation Loan Reality is Different Than Assumed

According to the promissory note for the Direct Consolidation Loan there is nothing that says the new Direct Consolidation Loan would inherit the underlying characteristics of a loan it paid off. It would be a new loan by a borrower which pays off an old obligation. If the borrower wanted to accept individual responsibility for the loan, I can find nothing that would prevent that.

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The promissory note says, “My Direct Consolidation Loan will, to the extent used to pay off loans made under the Federal Family Education Loan (FFEL), Direct Loan, and Federal Perkins Loan (Perkins Loan) programs…” And, “I promise to pay to the ED all sums disbursed under the terms of this Note to pay off my prior loan obligations…” And, “I understand that ED will send funds to the holders of the loans that I want to consolidate to pay off those loans.” – Source

So clearly a Direct Consolidation Loan would pay off the old loan and create a new loan which only one party could be obligated for. There is no regulation I can find that would require more than one person to be obligated for a Direct Consolidation Loan.

The Department of Education says, “Nothing in the law or regulations allowed for one of the borrowers of a joint consolidation to individually re-consolidate the loan.” But the flip side is nothing in the law prevents them from doing it either.

It appears the situation which is trapping people with these old FFEL consolidation loans is one created by assumption by the Department of Education and not one based in law or an official policy.

If you have found yourself in this spot, I would suggest you write your congressional representatives and ask them for help to extract you from what seems to be a non-official purgatory with your old loan. Feel free to include a link to this article in your request.

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Steve Rhode is the Get Out of Debt Guy and has been helping good people with bad debt problems since 1994. You can learn more about Steve, here.
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