Privately Held Federal Student Loans: When and How to Get Forgiveness

Most Americans understand the basic differences between federal student loans versus private student loans. But that’s not necessarily the case when it comes to privately held federal student loans. 

Yes, you read that right. Like everything else in the student loan world, why make it easy when you can make it complicated?

Privately held federal student loans are made by private lenders and schools, but guaranteed by the federal government. The most common types of privately held federal student debt are through the Federal Family Education Loan (FFEL) program and various loan programs via the U.S. Department of Health and Human Services (HHS).

Federal student loan borrowers have access to income-driven repayment (IDR) plans, loan forgiveness programs, and forbearance and deferment options. But privately held federal student loans don’t automatically receive these same benefits and protections since the government doesn’t own the loans.

Fortunately, the IDR Waiver offers a limited-time opportunity for borrowers with these types of loans. Here’s what to know about the intricacies of privately held federal student loans, and the actions to take before the end of 2023 to get the most benefit.

Types of privately held federal loans

To be clear, privately held federal student loans aren’t the same as private student debt. Private student loans are owned by private companies. They have varying interest rates and repayment options that the U.S. Department of Education (ED) has nothing to do with.

When discussing privately held federal student loans, we’re looking at loans that are guaranteed by the federal government. If a borrower defaults by not making monthly payments, the government will assume the debt obligation.

Let’s break down the most common types of privately held student loan debt.

FFEL Loans: Commercially-held vs. ED-held

The Federal Family Education Loan program began as part of the Higher Education Act of 1965, allowing private lenders to offer student loans backed by federal or nonprofit guaranty agencies. This program was widely used for decades until it was replaced in 2010 by the William D. Ford Direct Loan Program. 

Just before that time, during the height of the 2008 financial crisis, the federal government began purchasing FFELP student loans — resulting in a split in the type of FFEL Loans that exist today.

Although it ended over a decade ago, approximately 8.52 million borrowers have a cumulative $191.1 billion in outstanding FFEL Loans as of September 2023.

According to the federal student loan portfolio, outstanding FFEL Loans include:

• $87.4 billion commercially-held loans
• $41.5 billion ED-held loans
• $23.5 billion guaranty agency-held

The remaining FFEL Loans are categorized under “ED Total and Permanent Disability Servicer” and “ED Default Management System”.

If you have ED-held FFEL Loans, you received the same benefits as Direct Loan borrowers during the pandemic payment pause. But if you have commercially-held FFEL Loans (aka privately held federal student loans), you missed out on this unprecedented benefit and others because your loans aren’t owned by the government.

Department of Health loans

You can’t get FFEL Program loans anymore. But eligible health professionals and students can get funding through the Health Resources and Services Administration (HRSA), a subagency of the U.S. Department of Health and Human Services (HHS). This is the same agency that operates the Nurse Corps Loan Repayment Program and other debt cancellation programs. 

Various school-administered loan programs are available to schools to offer to students in need who are pursuing health professions degrees. Because these loans are administered by the school, students repay the loan directly to the school (or its loan servicer).

This type of loan is often thought to be private student debt. However, they’re actually privately held federal student loans that are issued under various congressionally funded programs.

Here are some popular loan programs:

• Loans for Disadvantaged Students (LDS). Available for schools with allopathic, osteopathic, podiatry, dentistry, optometry, pharmacy or veterinary disciplines
• Health Professional Student Loans (HPSL). Available for schools with podiatry, dentistry, optometry, pharmacy or veterinary disciplines.
• Nursing Student Loans (NSL). Available to nursing schools for full-time and half-time students pursuing a Registered Nurse (RN) degree.
• Primary Care Loans (PCL). Available if the school has doctoral students pursuing allopathic or osteopathic medicine.

Each of these loan programs has a 5% interest rate that is deferred while in school and begins accruing interest at the completion of the loan’s grace period.

Repayment options for borrowers with privately held federal student loans

Schools try to make as many types of loans available to students as possible. But many borrowers are confused by privately held federal student loans because payments are made directly to the school or a private lender. More importantly, borrowers don’t realize this type of loan can be consolidated into a Direct Consolidation Loan — giving you access to federal student debt relief programs.

Privately held federal student loans have limited eligibility for certain benefits and protections compared to other federal student debt. For example, most FFEL Loans only have access to one IDR plan and repayment terms for Department of Health loans are at the discretion of the school administering the loan.

But consolidation can open the door to additional income-driven repayment plans and student loan forgiveness opportunities, including Public Service Loan Forgiveness (PSLF).

The game-changing IDR waiver

Under the Biden Administration, student loan borrowers could take advantage of the PSLF Waiver that expired in October 2022. But all federal loan borrowers will receive a one-time account adjustment, called the IDR Waiver, allowing borrowers to receive additional payment credit toward loan forgiveness.

Under this one-time account adjustment, the ED will count student loan payments that wouldn’t normally count toward forgiveness, including any time spent in repayment or qualifying periods of forbearance or deferment.

That said, borrowers with commercially-held FFEL Loans and other non-Direct loans need to consolidate student debt by the end of 2023 to get the full benefits of the IDR Waiver.

Hesitant to consolidate? Prior to the IDR Waiver, loan consolidation came with heavy consequences. Specifically, it reset your payment count to zero for PSLF and IDR forgiveness. But if you apply for consolidation before the IDR account adjustment occurs, then you’ll reap the full benefits of the waiver.

If you miss the consolidation deadline (June 30, 2024), you can still consolidate your privately held federal student loans to maximize other benefits. For example, instead of basing your payment count on the loan with the longest payment history, your payment count will be adjusted based on a weighted average — still fast-tracking your forgiveness timeline.

What should you do with privately held federal student loans?

There’s a lot of confusion surrounding student loans, especially during a time when huge changes were rolled out back-to-back-to-back. If you don’t know whether you have federal loans or private loans (or somewhere in between with privately held federal student loans), you aren’t alone. But it’s important to understand what type of loans you have in order to put together a smart student loan repayment strategy. 

Depending on your situation, you might need to consolidate your student debt by 2023 to receive the maximum forgiveness credit available. If you aren’t sure what to do, book a consultation with one of our student debt experts ASAP before the end of the year.