Written By Adam S. Minsky, JD
A crucial deadline directly related to student loan forgiveness is approaching. To benefit from one of President Biden’s most successful student loan forgiveness initiatives, certain borrowers might need to consolidate their loans through the federal Direct Loan program by April 30, 2024.
But it’s important to note that not all borrowers need to consolidate. Given the widespread student loan servicing problems, getting clear guidance is a challenge.
Here's what borrowers need to know about consolidation and student loan forgiveness under Biden’s IDR account adjustment initiative.
Student loan forgiveness through IDR adjustment addresses historical challenges
The income-driven repayment (IDR) account adjustment, a policy introduced by the Biden administration nearly two years ago, targets historical inaccuracies and confusion surrounding IDR plans.
Borrowers were given misleading information about the availability of federal student loan repayment plans tied to their income. They weren’t adequately informed that repaying their student loans under such a plan could result in eventual loan forgiveness (typically after 20 or 25 years).
These issues were compounded by poor recordkeeping of loan servicers and inefficient oversight by the federal government, causing some borrowers who were doing everything right to still question whether they would ever receive loan forgiveness through IDR.
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Policy shifts and expanded eligibility
Under the account adjustment, borrowers can get past loan periods credited toward their 20- or 25-year IDR loan forgiveness terms.
This policy change applies even to periods previously not recognized under previous IDR rules, covering a wide range of federal student loan payments as far back as July 1994. It can also include certain periods of deferment and forbearances. However, most periods of default, in-school enrollment periods and grace periods wouldn’t count.
Borrowers who receive enough IDR credit under the adjustment to reach the 20- or 25-year mark can qualify for immediate student loan forgiveness.
At least 930,000 borrowers have already received discharges as the Education Department implements the program on a rolling basis. Other borrowers will be notified of how much IDR credit they have once the adjustment concludes later this summer.
The IDR Account Adjustment can also help borrowers seeking loan forgiveness through the Public Service Loan Forgiveness (PSLF) program.
PSLF can provide loan forgiveness in as little as 10 years for borrowers employed 30 hours per week or more for specific nonprofit or government organizations. The department can credit borrowers with months toward PSLF for loan periods as far back as October 2007.
Which loans qualify for the IDR adjustment?
Importantly, only government-held federal student loans can qualify for the IDR account adjustment. This includes:
- All Direct federal student loans
- Some Family Federal Education Loan (FFEL) program student loans
The FEFL program — discontinued in 2010 — allowed private, commercial lenders to issue loans backed or guaranteed by the government. Some FFEL loans have since been assigned or transferred to the Education Department, but others are still commercially held.
Borrowers with commercial FFEL loans must consolidate to get student loan forgiveness credit under adjustment
Since only Education Department-owned federal student loans qualify for the IDR account adjustment, any borrowers with federal student loans not held or owned by the department needs to apply to consolidate those loans through the federal Direct Loan program by April 30, 2024, to be eligible.
Direct Loan consolidation results in the Education Department paying off the loans selected to be included in the consolidation, leaving the borrower with a department-owned loan representing the combined balance of the loans that were paid off through the process.
The department expressly says that borrowers who have federal student loans not held by the Education Department should apply to consolidate by April 30, 2024, if they want to benefit from the account adjustment.
“We encourage borrowers who have commercially managed FFEL, Perkins, or Health Education Assistance Loan (HEAL) Program loans to apply for a Direct Consolidation Loan by April 30, 2024, to get the full benefits of the payment count adjustment,” says published guidance.
We encourage borrowers who have commercially managed FFEL, Perkins, or Health Education Assistance Loan (HEAL) Program loans to apply for a Direct Consolidation Loan by April 30, 2024, to get the full benefits of the payment count adjustment
U.S. Department of Education
If you have FFEL loans and are unsure if they are held by the Education Department or a commercial entity, you can log into your StudentAid.gov account.
Only direct student loans qualify for SAVE and Public Service Loan Forgiveness
FFEL loans that have been transferred or assigned to the Education Department can qualify for the IDR account adjustment. Borrowers with department-held FFEL loans can, thus, receive credit toward IDR loan forgiveness without needing to consolidate.
But only federal Direct Loans qualify for certain programs, like President Biden’s new SAVE plan (a more affordable IDR option), as well as PSLF. FFEL loans do not qualify for SAVE or PSLF, even if the Education Department now holds them.
As a result, borrowers who have any FFEL loans and want to enroll in SAVE or receive PSLF credit under the account adjustment should consider consolidating their loans via the Direct Loan Program prior to the April 30 deadline.
“Borrowers who have commercially or federally held FFEL loans and who apply to consolidate those loans into Direct Consolidation Loans by April 30, 2024, will also get PSLF credit under the payment count adjustment,” says the department.
Importantly, though, PSLF borrowers must take an additional step to certify their public service employment by using the online PSLF Help Tool in order to receive PSLF credit.
Consolidation to maximize student loan forgiveness credit
Borrowers who already have all Direct federal student loans should be able to get both IDR and PSLF credit under the IDR account adjustment. Other than certifying PSLF employment (if applicable), no further action may be necessary for these borrowers, as the account adjustment is being implemented automatically.
But even here, some borrowers may want to consider Direct Loan consolidation before the April 30 deadline.
Specifically, borrowers who have multiple loans with significantly different repayment histories (and, thus, potentially very different amounts of IDR or PSLF credit) can benefit from the account adjustment. Unlike before, when consolidation would erase previously earned IDR and PSLF credit, the account adjustment allows borrowers to not only retain that past credit but maximize it through consolidation.
“Assuming your repayment history overlaps for each loan, the [Direct] consolidation loan will be credited with the longest amount of time in repayment of the loans that were consolidated,” says the department.
“For example, say you had 50 months of time in repayment on one Subsidized Stafford Loan and 100 months of time in repayment on another Subsidized Stafford Loan. If you consolidated those loans, you would receive credit for 100 months of payments on the new Direct Consolidation Loan.”
The department’s guidance goes on to say, “If you apply for consolidation by April 30, 2024, the adjustment will count periods of repayment on your loans prior to the consolidation toward IDR forgiveness and (for eligible borrowers) PSLF. This differs from the earlier approach, in which consolidating your Direct Loans would reset your payment count to zero… If you recently consolidated your loans, your count of eligible and qualifying payments for both IDR and PSLF will temporarily reset to zero, but we will continue to forgive accounts that reach the IDR forgiveness milestones. But don’t worry—if you don’t reach forgiveness when you consolidate, we will update your account to show the full payments credited under the adjustment in 2024.”
Related: Does Loan Consolidation Affect PSLF Eligibility?
Final thoughts
Direct Loan consolidation isn’t required for many borrowers to benefit from the IDR account adjustment, particularly for those with Direct Loans with similar or identical repayment histories.
However, consolidation may be beneficial or even necessary for others to qualify for the IDR account adjustment.
And that April 30 deadline is critical.
“After the adjustment has been applied to all borrower accounts in 2024, accounts will be treated in accordance with the regulations in place at that time,” warns the Education Department.
Borrowers should be aware, notwithstanding these benefits, that there is a pending legal challenge seeking to block the IDR account adjustment. A new legal challenge targeting the SAVE plan may come later this month.
Borrowers will have to weigh the uncertainty associated with these legal challenges against the potential benefits of consolidating to access the IDR account adjustment and the SAVE plan.
Not sure what to do with your student loans?
Take our 11 question quiz to get a personalized recommendation for 2024 on whether you should pursue PSLF, Biden’s New IDR plan, or refinancing (including the one lender we think could give you the best rate).
