[00:00:00] Speaker A: For a brief time, way back when a married couple could take their separate student loans and consolidate them together. In this episode, we talk about all the hell that that caused for a brief period, and if you happen to do it, what you can do to get yourself out of it. Let's get started.
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Hello. My name is Brenton Harrison of Escape student Loan debt and your host for the Escape Student Loan debt podcast. This is the first episode of our podcast for 2024, and I hope that you guys are having a good new year so far or a happy new year so far. In this episode, I am trying to learn my lesson from the parent plus loan series of episodes that we did. Because, as I shared before we started covering parent plus loans, I operated under the assumption that so few people had them that it wouldn't be a topic that many of our listeners would take an interest in. And I was absolutely wrong. We've gotten more feedback on that episode than almost any of the other ones that we've done in the past. So in learning that lesson, I wanted to talk about another fringe type of student loan that not many people have in my experience. But if you have them, they are terrible and those are spousal consolidation loans. And if you want to know how rare this is, I'm reading from an article on thecollegeinvestor.com that's entitled the basics of spousal Consolidation student loans. And it says, the spousal consolidation student loans were offered until 2009, when Congress finally realized this is actually a terrible idea. As of today, at the date of the article 2023, there are less than 1000 spousal student loan consolidation victims left. Now, as small a number as that is, I've come across it three or four times in the 14 or 15 years that I've done it, and it is terrible. One of the people in the couple may have $60,000 of student loan debt, the other may have $40,000. And what they would do is they would put those loans into one pot, and they would take the average, the weighted average of those interest rates, and they would round it up to the nearest 8th of a percent as they do with consolidated loans. When you consolidate just your loans, and for the life of me, I don't know why anybody ever did it. I can't really think of a justification for why you would do so. But now there are people out there walking around in society and in their situation, they have loans that they have consolidated with their partner. And as confusing as it is for you on your own to get credit and negotiate credits towards things like income driven repayment, public service loan forgiveness, and what have you imagine trying to go through that process and recertifying your income and you're having to do it at the same time as your spouse. It is a nightmare. So in 2009, the government forbid the issuance of any further spousal consolidation loans. And since that time, they have not only been refusing to issue new loans, they have been trying to claw back the ones that have already been issued. So before the break, what we're going to do is we're going to tell you some basics of these loans. If you happen to have one or know of someone who has one, definitely send them this episode and we'll tell you things like is it eligible for income driven repayment, for public service loan forgiveness and the like. Then after the break, we'll tell you the government's process for actually trying to separate these spousal consolidation loans, what the timeline will be and how as an almost apology for issuing them in the first place. There is a wonderful opportunity for people who do have them to not make another student loan payment until that consolidated loan is separated to each of the individual borrowers. So first, the question is, are these loans eligible for income driven repayment? Not the income driven repayment plan waiver, just the plans in and of themselves. The answer to that question is yes. As a matter of fact, I'm reading from studentaid. Gov. It says yes. However, you and your spouse must each request the same income driven repayment plan. Also, regardless of how you and your spouse file your federal income tax return jointly or separately, your loan servicer will determine your eligibility and payment amount based on your and your spouse's combined income and eligible federal student loan debt. What they're saying is I can't have one of these types of loans and apply for the Save plan if my spouse wants to be on the pay as you earn plan. It's just one loan. You can't separate the two. It's also saying, unlike the situations we've talked about in the past, where you have the ability to decide whether you're going to file your taxes together and have both incomes included in the calculation or separately, again, you both have this loan. It doesn't matter. So regardless of whether or not you file jointly or separately, both incomes are going to be included and that payment is going to be determined by your student loan servicer. Now, it's important to note that this is a spousal consolidation loan, and those consolidations occur before the income driven repayment plan waiver. We've talked about the fact that prior to the waiver, when you consolidated a student loan that had credit towards forgiveness before consolidation, that credit went away and you were starting at month one on that newly consolidated loan. It's the same thing with spousal consolidation loans. It doesn't matter if these two partners each had, say, 100 months of credit towards forgiveness before they consolidated. Once they consolidated, they're starting again at month one. Now, after the break, we'll talk about how this applies when it relates to the waiver, but that's how it is prior to the waiver. The next question you probably have is, are these loans eligible for public service loan forgiveness when it's a consolidated loan with the spouse? The answer to that is also yes. Although, however, again, reading from studentaid Gov, to receive forgiveness of the entire remaining balance of the loan after making 120 qualifying payments, both you and your spouse must have been employed full time by a qualifying employer at the time each payment was made. What are they saying? They're saying that if I want, on a spousal consolidation loan to get public service loan forgiveness, I can't be the only one working for a nonprofit. Both myself and my spouse have to be working for a nonprofit or a government entity at the time that each qualifying payment was made. So it doesn't just mean that we each have to have ten years worth of credit. It means that that ten years worth of credit had to line up at the same time. Because if I worked for an eligible employer at a month that she didn't, that payment didn't count. We both have to be employed by eligible employers at the same time. If only one of you meets the employment requirement, only the portion of the remaining balance attributable to the original loans of that spouse would be forgiven. What does that mean? It means that, let's say that before we consolidated our loans, that, again, I owed 60,000, my wife owed 40,000. Well, when we combine them and owe 100,000, that means that 60% of the original pot was taken up by my loans. What they're saying is if in the future we have a consolidated loan, and I've been working for ten years worth of credit, and I apply for public service loan forgiveness, they're only going to forgive 60% of that spousal consolidation loan because that's the portion that is attributable to my debt. So as you can see this is really dumb. It makes no sense for people to have these loans. It makes no sense for the government to have ever offered them. It's definitely highway robbery. So after the break, we're going to tell you the Mia culpa that the government has done, the efforts that they're going to make to separate these loans, and the opportunity they're going to give to people who have them to make sure that they don't have a payment until that process is completed. This is the escape student Loan debt.
[00:07:32] Speaker B: Podcast, a show for established professionals whose student loan payments or loan balances are impacting their marriage, their business, their credit, or their dream of achieving home ownership.
[00:07:44] Speaker A: We'll be right back.
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[00:08:23] Speaker B: Welcome back.
[00:08:25] Speaker A: All right, so what is this maya culpa that the government has done when it pertains to consolidated student loans? It has to do with something called the Joint Consolidation Loan Separation act. I'm going to share my screen, so you can read this for yourself, or you can hear it as I read it says, on October 11, 2022, the Joint Consolidation Loan Separation act was signed into law to allow joint consolidation loan borrowers to separate their joint loan obligations and reconsolidate into new individual direct consolidation loans. It's saying that if you consolidated with your spouse, this act is going to allow you to separate them and put them back into your own respective direct consolidation loans. Now, how would this work in reality when the fact of the matter is you'll have this loan that's been together for a long time and it's probably grown, right, the interest has accrued on this debt? Well, it's a similar process to what I described before the break when I said, hey, if we're putting these loans together and they're having it forgiven under public service loan forgiveness, they're going to look at the initial percentage of my debt versus my spouse's debt that came into that consolidated loan. In the example that I used, it was 60% of the original total. So now, if that 100,000 that we owed on the consolidation loan has grown to 150,000. They're going to allow us to separate it, and 60% of that 150,000 would go to my newly consolidated separated loan, and the other remaining 40% would go towards my wife's remaining consolidated separated loan. And when those loans are consolidated, they're going to be given the same interest rate that was in effect for the joint consolidation loan. So let's say that the rate on that loan was 6.65%. That's also going to be the rate on my separated loan as long as I keep it separate and don't add any other loans to the consolidation process within six months of the date that it was consolidated. So it's essentially saying if I separate it and then I try to consolidate it again with some other student loans that I had within a six month process, as long as I don't do that, I'm going to be able to keep the rate of that consolidated joint loan with my spouse on the consolidated separated loan that I have on my own. This is ridiculous, but this is the terminology of federal student loans. Now, the next question is, how is this going to work as it pertains to the income driven repayment plan waiver? Because as you'll hear shortly, the process for separating these loans isn't even available yet. So how does that work? Reading from Studentaid Gov, it says that direct joint consolidation borrowers will receive the one time IDR account adjustment when it occurs. These borrowers will also be credited with any earned progress towards PSLF based on the account adjustment if they meet other PSLF requirements. So it's saying that they're going to apply the same rules towards everybody else's loans to these joint consolidation loans. Now, as I said, since the process for doing this isn't available yet, you're probably wondering, well, if they're going to do that account adjustment before the separation is even an option, how will they know how much credit to give me? It says later. Now, the adjustment will be applied retroactively for both borrowers when both applied to separate their joint consolidation loan. So it's saying even though the waiver will have closed, they will say, if you're separating these loans, we're going to give you this one time exception where they're applying those rules to your newly separated loans, even though the waiver has already expired. Again, I don't know any other way that makes it more obvious that they realize they screwed up than saying, we've already extended this waiver multiple times. We're going to do it yet again for these borrowers who are not going to be able to complete the process before the waiver expires because we haven't made the process available now, what is the timing of this process? They don't know. They do not think it's going to be available anytime in early 2024. So essentially what they're asking people to do is instead of applying for something that doesn't yet exist, they're telling you to just alert the student loan ombudsman. That's literally how you have to apply right now. And I say that in air quotes, since there's no formal application, the way that you can give your intent to separate is to just alert the student loan ombudsman to the fact that you have a consolidated loan with your spouse and you want to separate that loan as soon as the application becomes available. By giving that intent to separate, it puts you on a list where you have to be notified as soon as that application is available. But it also requires them to offer you an administrative forbearance. And that administrative forbearance will last for one year at a time. But the good thing about that administrative forbearance is as it pertains to the Student Loan Separation act, they are required to offer it to you for as long as it takes for the application to become available. Which means that if you have a consolidated loan with your spouse and it takes them three years to finalize that process, you will not have to make a student loan payment for three years. They would just one year at a time renew your forbearance until that application is available. Now, when it becomes available, you will, in most cases, both have to apply. As a matter of fact, it says under application process, if both joint loan consolidation borrowers want to apply for individual consolidation, each individual will need to complete an application for a direct consolidation loan. However, under certain circumstances, only one of the co borrowers may need to apply that. One of those certain circumstances is typically if the person was either divorced and doesn't have a way to readily access the income of their ex spouse if they're a victim of domestic violence or economic abuse. But it has to be a special circumstance. Otherwise, both of you have to separately apply for your own direct consolidation loans in order to have them separated. So that's a lot. And if you have one of these loans, I hope it was helpful to you to at least know that there is help on the horizon, but we just don't know how far we are off to that horizon. So what we're going to do in the show notes is we're going to put all of the links to the stuff we've been reading from in this episode. We're also going to put contact information for the student loan ombudsman so that if you're in this situation, you can alert them to your intent to separate that consolidated loan and you can stop making payments. And the good thing is that during this process, not only will you still be able to get credit while the IDR waiver exists, while the public service loan forgiveness waiver exists, but we've also talked about when you consolidate loans or do some type of activity with your loans that can cause the interest to capitalize. The good thing is, as a result of this forbearance, there will be no capitalization of interest. So they're doing everything that they can to make sure that they make up for their mistake. We're going to do everything we can to give you the information you need to be in that number that gets that administrative forbearance. I know this was an od episode to start the year, but again, this is something that's been coming up, so we wanted to make sure we cover it. The next time you hear from us, we'll be doing a much more general episode, but we hope that you will stick with us and see us in two weeks. Talk to you then. From escape student loan debt this was the escape Student Loan Debt podcast, a show for established professionals whose student loan payments or loan balances are impacting their marriage, their business, their credit, or their dream of achieving homeownership.
