The Washington PostDemocracy Dies in Darkness

People with student loans from defunct federal program seek relief

(Seth Wenig/AP)
5 min

Elizabeth Price wondered why she kept getting statements for her federal student loans.

There has been a freeze on student loan payments since the early months of the pandemic, but Price figured she must have missed some application process. She continued making payments, not giving it much thought because she was finally making headway on reducing her debt after more than 30 years.

By the time President Biden unveiled plans to cancel up to $20,000 in student loans last week, Price, 57, had $5,600 of the debt left — less than a quarter of what she originally borrowed. Biden’s plan would easily wipe away her balance.

“I celebrated,” said Price, a writer in Sarasota, Fla. That is until she looked up her loans on, where Price learned she had a type of federal debt owned by private companies that did not qualify for cancellation.

“I was really disappointed,” Price said. “I kept checking Twitter for news to see if there are any options for someone like me.”

Some federal student loan borrowers, locked out of the bailout, consider a risky move for relief

Millions of borrowers have been shut out of debt relief policies because their federal loans, originated through the defunct Federal Family Education Loan (FFEL) program, are held by private entities.

But borrowers with those commercially held FFEL loans can consolidate their debt into the Direct Loan program — where loans are made and held directly by the federal government — to become eligible for forgiveness.

Since the president’s announcement, there has been a spike in consolidations among commercial FFEL borrowers. While Biden’s plan applies to loans made on or before June 30, consolidation loans disbursed after that date are still covered as long as the underlying debt was originated on or before June 30, according to the Education Department.

Questions and answers about Biden's student loan forgiveness plan

The department said it will work with private lenders to ensure commercially held federal borrowers can benefit from the cancellation plan. Borrowers, according to the department, will have more than a year to apply once the application is available this fall and don’t need to take any action now.

Aside from the cancellation plan and payment pause, consolidating would also make commercial FFEL borrowers eligible for the income-driven repayment (IDR) account adjustment, which grants one-time retroactive credit toward loan forgiveness. It would also allow borrowers to take advantage of a temporary expansion of the Public Service Loan Forgiveness (PSLF) program.

But there are trade-offs.

Any uncapitalized interest on the loan is added to the balance, increasing the total amount owed. Consolidating could also result in a higher interest rate. And for people enrolled in an income-driven repayment plan, consolidating would usually mean losing credit for payments made toward debt cancellation. However, the income-based payment adjustment largely nullifies that last concern.

“People feel like they have to do something now or they’re going to miss out on the opportunity,” said Betsy Mayotte, president of the nonprofit Institute of Student Loan Advisors. But “anybody who’s not a PSLF candidate or not going to have a zero balance with the IDR waiver or [Biden’s] forgiveness plan could face real harm” in consolidating.

Price took all of the consequences into consideration before applying for a consolidation. She had less than $200 in unpaid interest and a relatively low balance, so the rewards far outweighed the risks, she said.

After Price graduated from Georgetown University, she postponed her loan payments multiple times amid bouts of unemployment, caring for her dying father, and work that paid just enough to cover her living expenses.

“It’s not that big a chunk of money,” Price said of her student loans, “but it’s a weight I’ve been carrying for 30 years, and it’s still hanging around at 8 percent interest.”

Mark Grimaldi, 39, also contemplated the risks of consolidating the $10,600 remaining on the loans he needed to attend Syracuse University. The move would increase his debt to $13,200, but as a former Pell Grant recipient, he would qualify to have that entire amount canceled.

Still, he worried that aside from news reports, there was no confirmation on the Education Department’s website that borrowers like him could consolidate to be eligible for cancellation.

“It’s not something I took lightly,” said Grimaldi, a radio producer and father of two in Buffalo. “I mean, if I made the wrong decision, I just cost my family a few thousand dollars. But if I did nothing, we’d have three times as much to pay back.”

Like Price, Grimaldi knew he took out federal loans, so how did they end up in the hands of private companies? It’s a bit of a fluke that’s rooted in the design of the FFEL program.

For years, the federal government was essentially a silent partner in a $60 billion program. Private lenders used their own money to finance the loans, but behind the scenes, the government paid a portion of the interest to make the debt more affordable. The government guaranteed the debt, taking on the risk of default as way to entice lenders. But after lenders were caught stealing from the government and paying off financial aid officers, the FFEL program lost favor on Capitol Hill.

When the 2008 recession threatened the liquidity of private lenders, the Education Department swooped in to buy some of the FFEL loans to keep the program going. By the time the Obama administration moved solely to direct lending in 2010, the portfolio of bank-based loans had been divided up among the department and companies like Navient and Nelnet. The Education Department-held debt is eligible for relief.

Consolidation is not an option for every borrower with a commercially held FFEL loan. People with FFEL Spousal Consolidation loans, which made couples jointly liable for their education debt, are barred from reconsolidating. Individuals who have already consolidated their commercial loans are usually prohibited from doing it again, but can consolidate to access a benefit such as the public service waiver, Mayotte said.