Student Loan repayment risk assessment

June 10, 2021 10:17 AM

Should I consolidate my federal student loans, which will end up costing me more in the long run, but which will give me a better chance of receiving Federal student debt relief, if it happens?

Background:

I took out Federal Stafford Loans for my graduate school education in 2007 and 2008. These loans were part of a program called FFEL that allowed for commercial loan servicers (mine is CFNC) to hold the loans. This program ceased to exist in 2010 and all federal loans are now direct loans.

I learned during COVID, that because my federal loans were commercially held, that I was not eligible for any of the CARES relief, even though they are Federal Stafford Loans. This same servicer CFNC gives me a 1.5% interest rate discount because I auto-draft them.

After speaking with Department of Education/Studentaid.gov, it seems that consolidating my loans under the DoE will give me a better chance of receiving debt relief if Biden will get off his ass and make it happen.

BUT if I consolidate, I will lose my interest discount:

*My CFNC discounted rate is currently 5.3% meaning that I will pay off my loan in 82 months, having paid $6k in interest.
*The consolidated rate will be 6.625% that I will pay off in 87 months having paid $8k in interest.

There are no other differences/pros/cons for me, as the current repayment program I use will remain the same, and I'm already just paying in one lump sum every month. So basically the situation is that I'll be paying $2k extra and extending my payoff 5 months for the possibility that I'll be eligible for Federal Student Debt Relief, if it even happens. And because they are graduate student loans, I still may not be eligible. So, do I risk it?

--Assume I have spoken, at length, for many hours of the last few weeks to my current loan servicer, the people at studentaid.gov, as well as a financial counselor, all of whom have laid out the above choices to me.
--Assume I cannot currently increase my monthly payment.
--Assume I am not eligible for any other current relief packages.

Appreciate your help!

posted by greta simone to Work & Money (5 answers total)

Most people with FFEL loans should consolidate into Direct (better repayment plans, PSLF for the eligible). I think you might be an exception.

If anyone gets left out of federal student loan debt relief, it will be people with commercially-held FFELs. Not to get into too much detail, but those borrowers in only certain states got any kind of CARES relief, and only because they have aggressive state governments who dropped the hammer on the loan-holders. The problem is that, unlike for federally-held FFELs and Direct loans, the loan-holder is a private entity in a program that was relatively lightly regulated when it began. So to forgive payments or balances, the government would actually have to fork out to the private entities, instead of changing its internal accounting. This is a harder sell, politically.

However, it's very uncertain whether any relief will ever occur. If it does, $10K is a figure that gets tossed around a lot, which would barely cover the increased interest payments for you. The math doesn't look good. (Also, if you can afford to service the debt at 6.625%, why aren't you doing that now? That will shorten the life of the loan and save you even more interest.)

Additionally--it's unlikely that people will just wake up one morning and find their loan balances reduced. It's more likely that it will take place on a certain date. You can consolidate into Direct any time, so unless that date is a short period away, or the balances must be as of a certain, very close-in date, you will probably be able to consolidate into Direct in advance. That's not guaranteed, though. I'd keep a careful eye on any proposals, whether legislative or executive, that appear to be progressing, to see what the details are.
posted by praemunire at 10:38 AM on June 10, 2021 [2 favorites]

The other question is if that interest rate reduction will still exist next year. If you got that discount before covid started I would expect it to continue, but if it was added last year they probably did it to discourage people from leaving, and after the "threat" of forgiveness passes they might remove the discount. So I would read over the terms of the discount to get a feel for how permanent it is.
posted by JZig at 10:53 AM on June 10, 2021

I consolidated my loans of this type at the beginning of this year (and would have done so sooner if I had known better/paid better attention UGH). In my case, Navient was continuing to charge interest through the Covid period (because they had the choice to do so or not to). I consolidated with Great Lakes and though my rate increased by .38% (or so), my loans are now at no interest through September.

It did take more than six weeks to process the consolidation, so if the grace period is not extended past September, I'm not sure if it would make enough difference for you. (Or, you may already be with a provider that is giving you the grace period when others did not.)
posted by Glinn at 11:12 AM on June 10, 2021

If you got that discount before covid started I would expect it to continue, but if it was added last year they probably did it to discourage people from leaving, and after the "threat" of forgiveness passes they might remove the discount.

Commercial FFEL autopay discounts are usually baked into the loan terms.
posted by praemunire at 11:19 AM on June 10, 2021 [1 favorite]

Response by poster: Correct that my reduced rate has been for the life of my loan so far.

I already pay a little over my required amount each month, so I'm assuming that even with the added interest I can continue paying more-or-less the same, assuming the base minimum is raised a little it will prob match what I'm already paying monthly.
posted by greta simone at 11:29 AM on June 10, 2021