Some Loan Holders Could Be Unfairly Shut Out Of Loan Forgiveness — Unless Congress Acts

What seemed like a smart financial decision may have unintended consequences for some student loan borrowers. Under a program introduced in the 1990s, married couples were allowed and encouraged to consolidate their separate student loans into one loan with a lower interest rate. Now, those borrowers are finding out that they are not eligible for President Biden’s one-time student loan forgiveness package, leaving many couples, both married and divorced, holding onto debt that would otherwise have qualified for forgiveness.

The program was terminated in the mid-2000s, but no way to separate the loans, in the case of divorce or even domestic abuse, for example, was ever introduced. Separating those loans could help borrowers be eligible to apply for, and get Biden’s student loan forgiveness — but as of now, there’s no way to do so. Why not?

Under Biden’s plan, borrowers with Direct Federal Loans qualify for up to $10,000 in forgiveness, and those who received Pell Grants qualify for up to $20,000 in forgiveness, under certain income levels.

Under the current system of spousal consolidation, borrowers are unable to separate their loans and are therefore unable to consolidate individually into a Direct Loan. Millions of borrowers still carry consolidated spousal debt after divorce, domestic abuse, financial abuse, or nonpayment by an ex.

In June, the Senate passed a bill that would provide a path to separation for spousal loans, which would allow those borrowers to be eligible for relief, but the bill now sits languishing in the House.

Senator Mark Warner (D-VA) applauded the Senate’s passage of the bill, dubbed the Joint Consolidation Loan Separation Act of 2021, and encouraged members of the House to act quickly.

“The Senate passage of this commonsense legislation is a huge step for survivors of domestic violence and financial abuse who have spent decades fighting for their financial freedom,” Warner said in a statement. “By finally allowing individuals to sever their joint consolidation loans, this bill will provide needed respite to vulnerable individuals who are being unfairly held responsible for the debt of a former partner. I urge my House colleagues to act with urgency and send this bill to the President’s desk as soon as possible.”

The Joint Consolidation Loan Separation Act, if it became law, would also be good news for those hoping to qualify for Public Service Loan Forgiveness, a program designed to forgive student debt for public servants and non-profit workers after a certain number of payments have been made. Spousal consolidated loans currently do not qualify for PLSF.

Last year, the Education Department announced a number of reforms to the poorly managed PSLF program, including waivers that would allow any past payments that were deemed ineligible to count towards forgiveness, but only for Direct Federal Loans.

Under the Joint Consolidation Loan Separation Act, public servants would be able to separate their loans from their spouses and take advantage of the PLSF waiver before it expires at the end of October. And if it becomes law before the end of the student loan forgiveness application deadline, these borrowers could also apply for wholesale loan forgiveness. But that’s only if Congress acts — and passes the law for President Joe Biden to sign it.