September 30, 2023
The End Of The Double-Consolidation Loophole Social Image

Federal Dad or mum PLUS loans will not be straight eligible for income-driven compensation plans. Nevertheless, there are two loopholes involving consolidation of Dad or mum PLUS loans that may make them eligible for income-contingent compensation or all income-driven compensation plans.

The second, which is called the pupil mortgage double-consolidation loophole, will finish on July 1, 2025. 

Eligibility for Earnings Contingent Compensation

If a Dad or mum PLUS mortgage is included in a Federal Direct Consolidation Mortgage and the borrower entered compensation on or after July 1, 2006, the consolidation mortgage is eligible for the income-contingent compensation (ICR) plan. [34 CFR 685.208(a)(2)]

The Dad or mum PLUS mortgage is just not straight eligible for any income-driven compensation plan. The consolidation mortgage can be not eligible for every other income-driven compensation plan. [34 CFR 685.209(a)(1)(ii), 34 CFR 685.209(c)(1)(ii) and 34 CFR 685.221(a)(2)]

These laws observe the statutory language within the Increased Schooling Act of 1965 [20 USC 1087e(d)(1)(D) and (E)], which specifies that the income-contingent compensation (ICR) plan is “not accessible to the borrower of a Federal Direct PLUS mortgage made on behalf of a dependent pupil” and the income-based compensation (IBR) plan is just not “accessible to the borrower of a Federal Direct PLUS Mortgage made on behalf of a dependent pupil or a Federal Direct Consolidation Mortgage, if the proceeds of such mortgage had been used to discharge the legal responsibility on such Federal Direct PLUS Mortgage or a [FFEL PLUS Loan] made on behalf of a dependent pupil.”

All income-driven compensation plans are based mostly on the statutory authority for ICR or IBR.

How Double Consolidation Works

If a borrower consolidates a consolidation mortgage that repaid a Dad or mum PLUS Mortgage, typically the income-driven compensation plans will probably be accessible to the brand new consolidation mortgage as a result of the mortgage servicer is just not conscious that the consolidation mortgage initially got here from a Dad or mum PLUS Mortgage. The unique kind of mortgage will get misplaced when the loans are consolidated for the second time.

The U.S. Division of Schooling has maintained that this double-consolidation is just not eligible for an income-driven repayment plan, as it’s opposite to the intent of Congress. Nevertheless, they’ve been unable to implement their interpretation of the legislation and laws due to insufficient monitoring of the unique kind of the loans that had been consolidated.

Double consolidation is a multi-step course of.

  • The borrower should consolidate their Dad or mum PLUS loans with two totally different servicers. To do that, they have to submit paper consolidation mortgage purposes. (In the event that they consolidate on-line, the 2 consolidation loans will probably be merged.) 
  • Two consolidation loans are essential to allow the borrower to later consolidate the consolidation loans collectively.
  • The borrower ought to embrace a request for the income-contingent compensation plan with these consolidation mortgage purposes to forestall the consolidation mortgage purposes from being rejected due to a failure to specify a compensation plan.
  • The borrower should watch for affirmation that the consolidation loans are full earlier than consolidating once more. This usually takes 30-45 days.
  • The borrower should consolidate the 2 consolidation loans with a 3rd servicer. This consolidation might be executed on-line at One should use a brand new servicer as a result of the opposite two servicers are conscious that the borrower consolidated Dad or mum PLUS loans. The brand new consolidation mortgage will then have misplaced the tag displaying the origin of the consolidation mortgage as together with a Dad or mum PLUS Mortgage.
  • Usually, one must wait 180 days earlier than consolidating a consolidation mortgage, as in any other case the loans can be merged into one of many present consolidation loans. Utilizing a 3rd servicer bypasses this limitation.

The Finish of the Pupil Mortgage Double-Consolidation Loophole

The new income-driven repayment plan regulations, which had been printed within the Federal Register on July 10, 2023, eradicate the double-consolidation loophole efficient July 1, 2025.

Particularly, the U.S. Division of Schooling specifies on web page 43836 of quantity 88, quantity 130 of the Federal Register:

“The Division is taking some further steps on this remaining rule to affirm our place concerning the therapy of dad or mum PLUS loans or Direct consolidation loans that repaid a dad or mum PLUS mortgage being solely eligible for the ICR plan. Up to now, limitations in Division knowledge might have enabled a dad or mum PLUS mortgage that was consolidated after which re-consolidated to enroll in any IDR plan, regardless of the Division’s place that such loans are solely eligible for the ICR plan.

The Division won’t undertake this clarification for debtors on this scenario at the moment on an IDR plan as a result of we don’t assume it might be applicable to take such a profit away. On the identical time, the Division is conscious that a lot of debtors have consolidated or are within the strategy of consolidating in response to latest administrative actions, together with the restricted PSLF waiver and the one-time cost rely adjustment.

As a result of a few of these debtors could also be together with dad or mum PLUS loans in these consolidations with out understanding that they would want to exclude that mortgage kind to keep away from complicating their future IDR eligibility, we will probably be making use of this clarification for any Direct Consolidation mortgage made on or after July 1, 2025.”

“Modifications: We added § 685.209(c)(5)(iii) to supply {that a} Direct Consolidation mortgage made on or after July 1, 2025, that repaid a dad or mum PLUS mortgage or repaid a consolidation mortgage that at any level paid off a dad or mum PLUS mortgage is just not eligible for any IDR plan besides ICR.”

Sensible Suggestions

There may be ample time for present Dad or mum PLUS Mortgage debtors who’re in compensation to make the most of the double-consolidation loophole earlier than it’s eradicated.

As of March 31, 2023, as many as a complete of $111.7 billion in Dad or mum PLUS loans to three.7 million debtors might doubtlessly have the ability to use the double-consolidation loophole.

If a borrower of a Dad or mum PLUS Mortgage makes use of the double-consolidation loophole to modify into the REPAYE plan, they may robotically be switched into the SAVE plan when it turns into accessible.

Dad or mum PLUS Loans and Federal Direct Consolidation Loans that embrace Dad or mum PLUS Loans are eligible for Public Service Mortgage Forgiveness.