Today’s student loan borrowers hold a variety of different student loans, and each loan type presents distinct challenges. For example, one of the most problematic federal student loans is the Joint Consolidation Loan, issued by the Department of Education between 1993 and 2006.
Financial advisors can help the clients they serve by understanding the problems related to Joint Consolidation Loans, and by monitoring the status of legislation designed to help the borrowers dealing with these cumbersome loans.
The Problem: Joint Consolidation Loans Harm Borrowers
Between 1993 and 2006, federal Joint Consolidation Loans were issued by the U.S. Department of Education. Married borrowers could consolidate loans from both spouses, or jointly consolidate the loans of either spouse. When a married couple borrowed a Joint Consolidation Loan, both borrowers became jointly and severally liable for repayment, meaning that each spouse became responsible for the entire debt, even in the event of divorce.
When Congress eliminated the Joint Consolidation Loan program on July 1, 2006, it failed to provide a mechanism for severing existing loans. Current law offers no way to separate the underlying loans. No exceptions are presently available even in cases of domestic violence and abuse.
As a result, borrowers nationwide remain liable for their abusive or uncommunicative spouse’s portion of their consolidated debt.
The Joint Consolidation Loans have additional problems.
For example, although borrowers with joint consolidation loans may repay under an income-driven repayment plan, both borrowers must request the same income-driven repayment plan, and each borrower’s eligibility is determined using joint income without regard for tax filing status. If a joint consolidation is eligible for partial discharge, the discharge does not eliminate the joint and several liability of each spouse for the balance that remains. Moreover, joint consolidation loans issued through the FFEL program cannot be reconsolidated into Direct Loans. This restriction prevents borrowers of Joint Consolidation Loans from gaining access to Public Service Loan Forgiveness and the income-driven repayment plans available only in Direct.
Joint Consolidation Loan Separation Act Allows Separation of Debt
On May 14, 2019, Congressman David E. Price (D-NC), Congressman Bradley Byrne (R-AL), and Congresswoman Haley Stevens (D-MI) introduced the Joint Consolidation Loan Separation Act with Senator Mark R. Warner (D-VA) and Senator Marco Rubio (R-FL).
The Joint Consolidation Loan Separation Act allows borrowers to apply to the Department of Education to split a joint consolidation loan into two separate federal Direct loans. The proposal contemplates that:
- The balance of the unpaid principal and accrued unpaid interest of the existing Joint Consolidation Loan would be divided proportionally between the two borrowers, based on the percentages that each borrower originally brought into the loan.
- The two new federal direct loans will have the same interest rates as the joint consolidation loan.
- Each borrower will have the ability to transfer eligible payments made on the joint consolidation loan towards income-driven repayment programs and the Public Service Loan Forgiveness program.
- The proposed rule allows two borrowers to submit a joint application to sever their joint consolidation loan or one borrower to submit a separate application in certain circumstances. Those separate applications would be available when:
- One borrower is the victim of domestic or economic abuse or
- One borrower has certified that they are unable to reasonably reach or access the loan information of the other borrower or
- An individual application is deemed appropriate by the Secretary of Education
The bill has bipartisan and bicameral cosponsors and is supported by organizations including domestic violence advocacy organizations and the National Consumer Law Center. National Consumer Law Center attorney Joanna Darcus said, “For far too long, many student loan borrowers have been stuck in joint consolidation loans, and this bill ensures that struggling borrowers, including survivors of domestic and economic abuse, who previously consolidated their student loan debts, have the opportunity to regain their financial footing.”
Read the full text of the bill here.
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