(LOANS-24-13) Joint Consolidation Loan Separation Guidance for Commercial FFEL – Phase II

On October 11, 2022, the Joint Consolidation Loan Separation Act (JCLSA) was signed into law.  It allows both Direct Loan (DL) and Federal Family Education Loan (FFEL) joint consolidation loan (JCL) borrowers to separate their joint debts into new, individual Direct Consolidation loans.

Phase I of JCLSA implementation began on September 30, 2024, when the Combined Application to Separate a Joint Consolidation Loan and Direct Consolidation Loan Promissory Note (Application/Promissory Note) became available for JCL borrowers to complete and submit. The October 1, 2024, Electronic Announcement (LOANS-24-10) explained how the U.S. Department of Education (Department) would implement the JCLSA in two phases and provided guidance to FFEL loan holders for Phase I.

This Electronic Announcement explains how Phase II of the JCLSA will be implemented. It also provides guidance to FFEL lenders, guaranty agencies, and servicers on their responsibilities during the JCLSA final implementation phase.

The Consolidation Originator, which manages the Consolidation Loan origination process for the Department, will confirm applicants have submitted fully complete applications. If the application is incomplete or missing information, the Consolidation Originator will contact the applicants regarding the additional information needed. The application may be cancelled if the applicant does not provide the missing information after 30 days.

Due to system limitations for many FFEL servicers and loan holders, only one of the co-borrowers on JCLs is listed as the borrower and may sometimes be referred to as the primary borrower. Only the primary borrower is reported externally to the National Student Loan Data System (NSLDS) and credit reporting agencies due to these system limitations.

When the co-borrower not listed as the primary borrower submits an Application/Promissory Note to separate a JCL and then tries to complete a Repayment Plan Request or Income-Driven Repayment (IDR) Plan Request online, they may be notified that they do not have an eligible loan in the online application flow on StudentAid.gov. The Consolidation Originator will contact applicants unable to choose a repayment plan for themselves, or the applicants can send the paper IDR Plan Request with their Application/Promissory Note.

The Consolidation Originator will contact each applicant to allow them to choose their servicer for the new Direct Consolidation Loan. Once all steps have been completed, each applicant will be notified that processing has begun.

The Consolidation Originator sends Loan Verification Certificates (LVCs) to the JCL loan holder for each applicant which are intended only for JCL separation and not to include other loans for consolidation. Borrowers who wish to consolidate non-JCL loans with their new Direct Consolidation Loan must complete the Loan Consolidation Request to Add Loans form within 180 days of making the new Direct Consolidation Loan. 

In this LVC, the term “borrower” refers to the joint consolidation loan co-borrower who has applied to separate the joint consolidation loan, and the term “co-borrower” refers to the current or former spouse of the borrower with whom the borrower currently owes the joint consolidation loan. The LVCs sent to the FFEL loan holders include borrower information from the NSLDS. The LVC is used to verify the eligibility and payoff amount of the joint consolidation loan that the borrower has applied to separate.

When there is a joint application for JCL separation, each JCL co-borrower will submit an individual Application/Promissory Note to the Consolidation Originator. Concurrently, an LVC will be sent to the FFEL loan holder for each applicant. The LVC should be completed for each co-borrower and returned to the Consolidation Originator.

When there is a separate application for JCL separation, only one of the co-borrowers will submit an Application/Promissory Note. They will also certify on the form that they have experienced domestic violence by the other co-borrower, economic abuse from the other co-borrower, or are unable to reasonably access the other co-borrower’s loan information. The FFEL loan holder will receive one LVC to complete for the applicant/borrower and return to the Consolidation Originator.

When the commercial FFEL servicer or loan holder receives an LVC for a separate application for separation, the lender, guaranty agency, or servicer shall contact the remaining co-borrower and notify them of their option to apply for separation.

The returned LVC will be used to determine the payoff amount based on the application type. Loan summary letters are sent to each applicant for joint applications, and the individual applicant for separate applications.

Applicants are given 10 days to cancel the separation and new consolidation. After this 10-day period has concluded, the Consolidation Originator initiates the payoff process by sending the JCL manual payoff spreadsheet to the FFEL JCL lender, guaranty agency, or servicer. This spreadsheet provides information needed to identify the co-borrowers and indicates the JCL application type.

The FFEL JCL lender, guaranty agency, or servicer has 10 business days to complete the JCL manual payoff spreadsheet and return to the Consolidation Originator with under/over payment amounts.

The Consolidation Originator completes and returns the JCL manual payoff spreadsheet to the FFEL lender, guaranty agency, or servicer with the close-out under/over payment amounts within 10 business days.

Each applicant will have a new individual Direct Consolidation Loan disbursement. For joint applications, whether the separation is proportional or non-proportional, the payoff amount is the full balance of the JCL. For separate applications, only the payoff amount for the applicant is included while the remaining balance of the JCL will remain with the original FFEL JCL lender, guaranty agency, or servicer.

For joint applications, once the payoffs are processed, FFEL loan holders will report the JCL as paid in full through consolidation with a zero balance to NSLDS.

For separate applications, a payoff is only provided to the FFEL loan holder for the applicant. The remaining co-borrower will still have a JCL with the original JCL loan holder. Therefore, the JCL will be reported with a balance reduced by the amount of the payoff for the applicant and the appropriate loan status for the non-applicant to NSLDS for the remaining co-borrower.

If just one of the JCL co-borrowers applies to separate the joint debt and that individual was reported as the borrower of the JCL in NSLDS due to NSLDS systems limitations, it will be necessary for the original JCL loan holder to update the borrower identifiers on NSLDS to identify the non-applying co-borrower as the borrower of the remaining portion of the JCL after the applying co-borrower’s portion has been separated.

Normal credit reporting occurs for JCL borrowers who use the joint application for separation process. Credit reporting changes will be required for separate application scenarios where the remaining borrower on the JCL was not the listed primary borrower and will be the only remaining borrower. A new tradeline will be required to be opened for this borrower with a new:

However, the new tradeline retains all the following data points from the original tradeline:

It is important to note that the Department conducted a one-time payment count adjustment of IDR-qualifying payments for all Direct Loans and federally owned FFEL loans in 2024. Borrowers with commercially-held FFEL loans were eligible for the adjustment if they consolidated their loans into a Direct Consolidation Loan. The payment count adjustment counted time toward IDR forgiveness, including:

More details about the payment count adjustment can be found on StudentAid.gov.

Even though the JCL separation process was not available in time for the one-time payment count adjustment, all JCL borrowers who submit an Application/Promissory Note by June 30, 2025, will receive the benefit of the payment count adjustment. The adjustment will be applied for both borrowers who apply to separate their JCL through the joint application process.

For separate applications, the remaining co-borrower who did not apply to separate the joint debt will not receive this benefit unless and until the co-borrower submits an Application/Promissory Note to separate and consolidate into a Direct Consolidation Loan by June 30, 2025.

Likewise, commercially-held FFEL JCL borrowers who go through the separation and consolidation process will also be credited with earned progress toward Public Service Loan Forgiveness (PSLF) based on the payment count adjustment if the borrowers were working for an eligible employer during the months credited toward IDR. Each co-borrower will need to use the PSLF Help Tool or complete a PSLF Form to assess their employment eligibility once the individual Direct Consolidation Loan is made. This can occur after the IDR payment count adjustment.

Once separated, borrowers should not expect to have the payment count adjustment credited to their new Direct Consolidation Loan immediately. The Department will not be prepared to apply the payment count adjustment to separated JCLs until after June 2025.

From October 6, 2021 to October 31, 2022, the Department implemented temporary changes to the PSLF program rules. This temporary opportunity, known as the Limited PSLF Waiver, gave borrowers credit for prior payments they made that would not otherwise count toward PSLF. Any payments made while working for a qualified employer counted as a qualifying payment regardless of the loan type or repayment plan.

FFEL borrowers looking to take advantage of the Limited PSLF Waiver were required to consolidate into DL and submit a PSLF form by October 31, 2022, to participate. The Department created an additional process for FFEL JCL borrowers to express interest in the Limited PSLF Waiver. Borrowers were required to identify themselves to the Department prior to the deadline of October 31, 2022, because these borrowers had no means to separate and re-consolidate prior to the deadline.

These borrowers who took the steps outlined by the Department to express interest in the Limited PSLF wavier are being notified through a separate communication that the Application/Promissory Note is available to be submitted, and their loans separated. When their loans are separated, the PSLF-eligible payment counts will be adjusted after June 2025 to reflect the terms of the Limited PSLF Waiver. This is the only group of borrowers who will receive this treatment. All other JCL borrowers interested in applying for PSLF will follow the normal PSLF process.

Those who submit their Application/Promissory Note by June 30, 2025, as outlined in the Payment Count Adjustment section, will receive updated IDR and PSLF qualifying payment counts based on their JCL payment history. For those who submit their Application/Promissory Note after June 30, 2025, no qualifying payments will be counted for the underlying commercial FFEL JCL.

The Department continues to request that all FFEL loan holders offer forbearance or payment suspension for all commercially-held FFEL JCL loans when at least one of the co-borrowers request a forbearance or payment suspension while they wait for the separation process to become fully available as outlined in LOANS-23-06. 

The forbearance or payment suspension will remain in effect until the JCL is separated and re-consolidated for all commercially held FFEL JCL loans when at least one of the co-borrowers has submitted an Application/Promissory Note. FFEL loan holders will be notified that the borrower has requested separation by receiving the LVC.

For separate applications for separation where one of the co-borrowers does not apply, the remaining JCL with one co-borrower will return to the loan status it had previously been in prior to the forbearance or payment suspension after the separation is completed.

The forbearance or payment suspension ends for all commercially held FFEL JCL loans if at least one of the co-borrowers has not submitted an Application/Promissory Note by January 31, 2025.

Guaranty agencies, lenders and servicers should email questions related to JCL FFEL loans and the JCLS process to fps.lidprocess@ed.gov.

Please contact JointConsolidation@ed.gov for questions related to JCL FFEL loans and the JCLS process.