This month, I’m wrapping up two cases that involved major federal student loan consolidation errors by the U.S. Dept. of Education and an assortment of student loan guaranty agencies, servicers, and debt collectors. These errors were massive, complex, and entirely not the borrower’s fault. They also took months of effort and coordination to resolve. I am ecstatic that we obtained good outcomes for my clients and got the errors fixed, but unfortunately these problems are not exactly uncommon. It really shouldn’t be this difficult for student loan borrowers, but sometimes, it is.
If you’re thinking about consolidating your federal student loans through the federal Direct consolidation program, there are potentially many benefits: streamlined repayment (one combined loan, one servicer, one monthly bill); simplified interest (if you are converting variable-rate loans to the fixed, weighted-average interest rate provided by the Direct consolidation program); default resolution if you are including defaulted federal student loans in the consolidation; and conversion to the Direct loan program through which you can access some additional student loan forgiveness and repayment programs.
But when things go wrong – especially due to mistakes outside of your control – it can be a mess to untangle. Here are some things to watch out for.
Be Careful of Making Consolidation Mistakes Yourself
It’s easy to make some innocent errors during the consolidation process that can cost you later. For example, if you consolidate Perkins loans with your other federal student loans, you may lose out on unique Perkins-loan-specific cancellation and forgiveness programs, depending on your profession. Or if you combine your Parent PLUS loans with your own federal student loans, you may suddenly become ineligible for some of the most beneficial student loan forgiveness and repayment programs. These errors, when made by the borrower, can be extremely difficult or impossible to undo.
Make Sure the Consolidation Loan List is Accurate
When your consolidation loan is about to be issued, you should receive a “Summary Letter” that provides a table with all of the loans that are being included in the consolidation. Make sure that list is accurate. All loans that you want to be included in the consolidation should be listed there. And none of the loans that you want to be excluded (such as a Parent PLUS loan or Perkins loan) should be in that list. Some of the biggest problems I see involve loans that were either erroneously included or excluded from a consolidation (even though the borrower completed the application correctly). This can lead to problems down the road – including default.
Make Sure the Consolidation Loan Balance is Accurate
In that same summary letter, your consolidating loan servicer should also tell you what the estimated consolidation loan balance is going to be. It’s not uncommon for the loan balance to be a bit higher than expected. One reason is because of outstanding interest that is being capitalized. Or if you are consolidating defaulted loans, the U.S. Dept. of Education is authorized to charge a fee of 18.5% that becomes part of your consolidation loan. But if the balance seems way off, something may be wrong. If you can’t get an adequate explanation from your servicer, it may be prudent to stop the consolidation loan from going through – you can contact your loan servicer for instructions on how to do that (just be careful of the deadline, which will be outlined in that same letter).
Confirm That the Underlying Loans Get Paid in Full
The servicer handling the consolidation application is supposed to confirm your loan balances with your current loan holders, and then pay off those loan balances when they issue and disburse the new consolidation loan. But far too often, I see major errors during this process. For example, the consolidation servicer may accidentally underfund the payoff payment to one of your loan holders, resulting in a small balance remaining on a loan that should have been entirely paid off. Or the consolidation servicer may send the “check” to the wrong company. I’ve even seen situations where the consolidation servicer does not pay off the loan holders at all – leaving the borrower with a duplicate loan balance once the consolidation loan has been issued. These are nightmare scenarios that are fixable, but if you don’t take steps to confirm that your loan holders were actually paid in full by the consolidation, you may be harmed by credit damage and additional fees and penalties.
Bankruptcy, Judgments, and Wage Garnishment Can Prevent Consolidation…
This is a big one. Borrowers who are in an active bankruptcy may not be able to consolidate – and even borrowers who have recently completed bankruptcy may encounter problems because there sometimes is a lag in reporting that the bankruptcy has ended. A prior court judgment on a federal student loan could impede consolidation as well, either by imposing additional requirements on the borrower (i.e., making payments before consolidating) or by preventing the consolidation from going through at all. Having your wages garnished if you are in default on federal student loans can also stop a consolidation; you may have to make payments to first lift the garnishment order before you will be allowed to consolidate.
… But Nothing Else Should
Absent an active bankruptcy, an outstanding judgment, or a wage garnishment order, a student loan borrower should be able to consolidate through the Direct consolidation loan program, as long as they have eligible federal loans. Nevertheless, I have repeatedly seen loan servicers refuse to consolidate a borrower’s eligible federal student loans where none of these issues were present. In every case this has been an error that we’ve had to fight. If you’re being told that you’re not able to consolidate, and the servicer’s explanation is incomplete or nonsensical, it may be time to file a complaint or obtain outside help.
Federal student loan consolidation through the Direct loan program can be great for borrowers, but be vigilant, and don’t assume it will necessarily be smooth sailing.