In the wake of federal student loan repayments resuming in October, many parents are finding themselves burdened with high debt. A little-known loophole called “double consolidation” has emerged as a strategy to ease the financial strain caused by Parent Plus loans. This approach enables parents to hide the existence of their Parent Plus debt by combining it with new loans. The consolidated loan then becomes eligible for more flexible repayment options, including President Biden’s recently introduced Saving on a Valuable Education (SAVE) plan.
Parent Plus loans, designed to provide financial assistance to parents with limited resources to help their children with college expenses, have been criticized for their high interest rates and lack of repayment options. While students have access to various repayment plans, parents are limited to just one income-driven plan called Income-Contingent Repayment (ICR). This plan caps monthly payments at 20% of discretionary income. In contrast, the SAVE plan, capped at 10% of discretionary income, is more favorable. However, Parent Plus loans are currently ineligible for enrollment in the SAVE plan, despite advocacy groups arguing for access.
With the loophole, parents can take advantage of double consolidation. This involves having at least two loans, such as two individual Plus loans or a Plus loan combined with loans taken out for the parent’s own education. Parents must submit separate consolidation applications to two different loan servicers, followed by a final consolidation to combine all the loans. The process takes approximately 4 to 6 weeks. Proper sequencing is crucial to prevent being limited to the ICR plan and render the strategy futile.
While there are risks, including potential slightly higher interest rates and the necessity of correct sequencing, parents are being encouraged by state authorities and advocacy groups to explore this option before the loophole is closed. The Education Department acknowledged the loophole’s existence and pending closure, but has decided against retroactively removing the benefit for borrowers currently on an income-driven plan.
Parents embarking on double consolidation must meet specific deadlines. The temporary credit given toward loan forgiveness programs for consolidated student debt will expire at the end of this year. After that, borrowers will have to wait until July 1, 2025, when the Education Department’s SAVE regulation goes into full effect and allows consolidation without losing credit towards debt cancellation.
Although the double consolidation strategy offers hope for parents like Michele Lloyd, who believes the current payment plans are financially unsustainable, it is not without its challenges and uncertainties. She remains optimistic that the process will go smoothly, alleviating the burden of her debt and providing her with a manageable repayment plan.