On June 30, 2010, more than ten years ago, the Federal Loan Program for Family Education (FFELP) ended. Since July 1, 2010, all new federal education loans have been granted through the direct loan program.
However, many borrowers still have FFELP loans. Almost 10.6 million borrowers still owe $ 238.8 billion in FFELP loans, according to the U.S. Department of Education. That’s an average of $ 22,528 per borrower.
Almost half of these loans are held by commercial lenders, not the U.S. Department of Education or guarantee agencies. These borrowers have three main options for dealing with their FFLEP loans:
In this article, we examine the pros and cons of the latter two options.
Advantages and Disadvantages of Consolidating FFELP Loans
Here are the main advantages and disadvantages of consolidating your FFELP loans.
Benefits of Consolidation
Federal loans in the direct loan program are entitled to the payment break and the interest waiver. This limited service expires on September 30, 2021, but can be extended. Consolidating FFELP loans into a Federal Direct Consolidation Loan makes the loans eligible for the payment break and the interest waiver.
FFELP loan consolidation could also call them into question for future student debt relief. President Biden has expressed his support for the $ 10,000 student loan grant. Members of Congress have proposed cutting up to $ 50,000 on federal student loans. One way to limit costs is to limit the right to be forgiven. FFELP loans and private student loans may not be eligible, just as they may not be eligible for the payment break and interest waiver.
By consolidating FFELP loans into a federal direct consolidation loan, these loans become eligible for Public Service Loans (PSLF). The new consolidation loan is eligible for tax-free loan waiver after the borrower has made 120 qualifying payments on the consolidation loan while working full-time for a government employer.
Consolidation loans are entitled to a more flexible variant of extended repayment. Without consolidation, borrowers are eligible for a 25-year amortization schedule if they owe $ 30,000 or more in federal loans. In the case of consolidation, the maximum repayment period is based on this table according to the amount owed:
By extending the repayment period from 10 to 30 years, the monthly payment is roughly halved. But it will also triple the total interest paid. By extending the repayment period to 20 years, the monthly installments are reduced by more than a third, but the total interest payment is doubled.
FFELP borrowers are already eligible for Income Based Repayment (IBR), which waives the remaining debt after 25 years of repayment and has a monthly loan payment of 15% of disposable income. However, once consolidated, their FFELP loans may qualify for the revised Pay-As-You-Earn Repayment Plan (REPAYE), which reduces the monthly payment to 10% of disposable income and offers a valuable ongoing interest subsidy.
Finally, the consolidation can be used to clean up failed FFELP loans. This is a one-time option. And the borrower must agree to repay the loan under an income-based amortization plan.
Cons of Consolidation
FFELP loan consolidation is not without risk. First, because a consolidation loan is a new loan, the payment clock is reset. So, an income-based repayment (IBR) borrower will lose the progress they have made towards 25 years of remaining debt relief.
Second, borrowers who benefit from credit discounts, such as B. Discounts with immediate payment, benefit from these discounts. The only discount available on direct lending is a 0.25% interest rate cut on the automatic monthly loan payment through Autopay.
Advantages and Disadvantages of Refinancing FFELP Loans
Now that we’ve covered the pros and cons of consolidating your FFELP loans, let’s look at the pros and cons of refinancing with a private lender.
Advantages of refinancing
Student loan refinancing can allow borrowers with great credit ratings to qualify for a lower interest rate. This is especially true for older loans that were granted at significantly higher interest rates. Current federal student loan interest rates are at or near record lows.
Refinancing a private student loan without a co-signer is also a way to get the equivalent of a co-signer approval. The new private student loan pays off the old loans and thus effectively releases the co-signer from the obligation to repay the old loan.
The biggest challenge is to qualify for private refinancing without a co-signer. However, if the borrower has a steady job and has made all payments on time for a number of years, their credit profile may have improved enough to qualify for a private refinance themselves.
Disadvantages of refinancing
Refinancing federal student loans into a private student loan causes the loans to lose access to the superior benefits of federal student loans. In addition to the pause in payment and the waiver of interest, these advantages include:
- Postponement in economic hardship
- Postponing unemployment
- General forbearance
- Death and disability discharges
- Income-oriented repayment plans
- Lending Opportunities
Still, a borrower might consider refinancing if they have older FFELP loans when interest rates were as high as 8.5%. The savings could be enough to offset the loss of repayment flexibility.
Both student loan consolidation and refinancing are one-way deals. Once your FFELP loans have been consolidated or refinanced, there is no way to reverse the transaction. So make sure that you have carefully considered the pros and cons before deciding which of the options to choose.
If you want to keep your existing government benefits or qualify for more, consolidation is the way to go. However, if interest savings are your primary goal, a refinance might be right for you.
Finally, if you want to strike a balance between these two priorities, it might be better to keep your FFELP loans separate and expedite the repayment of your loan with the highest interest rate. This allows you to reduce your interest costs in the short term without giving up the option of joining the IBR plan or taking out a direct consolidation loan later.