IDR Account Adjustment: Should You Consolidate to Get Student Loan Forgiveness?

The Biden administration finally released comprehensive new guidance for a major initiative that could result in millions of borrowers receiving accelerated student loan forgiveness.

The IDR Account Adjustment, which the Biden administration first unveiled last year, is a one-time program that will allow borrowers to receive retroactive credit toward student loan forgiveness under Income-Driven Repayment (IDR) plans. IDR plans use a formula based on a borrower’s income and family size to determine their monthly payments. Payments are then recalculated annually, and if there is any balance remaining at the end of the plan’s repayment term (10, 20 or 25 years, depending on the plan), the borrower would be entitled to loan forgiveness.

But IDR has been poorly implemented by the Education Department and its contracted loan servicers. In recent years, there have been widespread reports of so-called “forbearance steering,” whereby loan servicers allegedly placed borrowers into costly forbearances, rather than an affordable IDR plan. And consumer advocates have accused both the government and private loan servicing companies of not properly keeping track of borrowers’ IDR progress. This is important, as under the original IDR framework, only time spent in an IDR plan can count toward student loan forgiveness.

The Biden administration has billed the IDR Account Adjustment as a one-time fix to address these past problems. The initiative will allow the Education Department to credit borrowers with time toward an IDR loan forgiveness term for periods that previously would not have counted. This includes repayment periods on any kind of federal student loan regardless of the payment plan (including periods before consolidation), as well as certain past deferment and forbearance periods. The department can go back as far as July 1, 1994 to “count” these periods.

Some borrowers will receive enough retroactive IDR credit to cross the threshold for loan forgiveness. Others will not, but they may significantly advance their progress toward eventual loan forgiveness on a 10-, 20- or-25-year term, shortening their remaining time in repayment.

As outlined by the new Education Department guidance, Direct loan consolidation is a central feature of the IDR Account Adjustment. While borrowers with government-held loans may qualify for IDR credit automatically, other borrowers may need to consolidate their loans to receive the benefits. And in some cases, even borrowers who already qualify automatically could still benefit from Direct loan consolidation. But there also could be some serious drawbacks to consolidating as well.

Here's a breakdown.

Benefits of Consolidation for IDR Account Adjustment

There are a number of potential benefits to consolidating, for purposes of benefiting from the IDR Account Adjustment, and in some cases, consolidation is actually required to receive any relief.

Borrowers with commercially-held FFEL loans and other non-direct student loans

Only government-held federal student loans will qualify for the IDR Account Adjustment. This includes all Direct-program loans, and some FFEL-program loans that are administered by the Education Department.

But other federal student loan borrowers would need to consolidate. “Borrowers who have commercially managed FFEL, Perkins, or Health Education Assistance Loan (HEAL) Program loans, should apply for a Direct Consolidation Loan by the end of 2023, to get the full benefits of the one-time account adjustment,” says the department in its new guidance.

Borrowers with any FFEL loans seeking student loan forgiveness through PSLF

Credit under the IDR Account Adjustment can also count toward Public Service Loan Forgiveness (PSLF) for borrowers who were employed by qualifying nonprofit or government organizations during applicable loan periods after October 1, 2007. PSLF can provide student loan forgiveness after 120 qualifying payments – which equates to as little as 10 years. 

But only Direct student loans qualify for PSLF. So, borrowers who have any non-Direct loans (including any FFEL loans, whether commercially-held or government-held) would need to consolidate those loans via the Direct consolidation program to receive PSLF benefits from the adjustment.

Borrowers with multiple student loans and different repayment histories

The Education Department’s updated guidance confirmed a significant piece of information – that borrowers who consolidate multiple federal student loans with different repayment histories may receive IDR and PSLF credit from the loan that has the longest repayment history.

“Assuming your repayment history overlaps for each loan, the consolidation loan will be credited with the longest amount of time in repayment of the loans that were consolidated,” says the new guidance. The department provides an example where one federal Stafford loan has 50 months of IDR credit, and another Stafford loan has 100 months. “If you consolidated those loans, you would receive credit for 100 months of payments on the new Direct Consolidation Loan,” says the Education Department.

That provides a potentially major incentive for borrowers with a mix of older and newer federal student loans to consolidate. Otherwise, their individual loans would receive different amounts of IDR and PSLF credit and, thus, would become eligible for student loan forgiveness at different times.

Borrowers looking to access certain income-driven repayment plans

Another possible benefit of Direct loan consolidation is expanded access to certain IDR plans. Borrowers who receive credit under the IDR Account Adjustment but fall short of the threshold for student loan forgiveness would need to continue repaying their loans under an IDR plan to progress toward eventual loan forgiveness.

The new Education Department guidance confirms that unconsolidated Parent PLUS Loans can get credit under the IDR Account Adjustment, which is a big deal, since unconsolidated Parent PLUS loans don’t qualify for IDR, as a general rule. However, if a Parent PLUS borrower is short on the threshold for loan forgiveness, the only way to continue making payments under an IDR plan would be to consolidate the Parent PLUS loans via the Direct consolidation program, at which point they can access the Income-Contingent Repayment (ICR) plan – the only IDR option available for Parent PLUS borrowers.

In addition, borrowers who consolidate FFEL-program loans other than Parent PLUS loans can repay their Direct consolidation loan under the Saving on a Valuable Education (SAVE), formerly Revised Pay As You Earn (REPAYE), which in many cases will be more affordable than Income Based Repayment (IBR), the only FFEL-eligible IDR plan.

Downsides to Consolidating for IDR Account Adjustment

While there are clear possible benefits to Direct loan consolidation for the IDR Account Adjustment, there are also some important potential drawbacks to consider.

Consolidating FFEL and Direct loans could impact eligibility for Biden's separate student loan forgiveness plan

Borrowers trying to maximize the available benefits under the IDR Account Adjustment by consolidating may inadvertently become ineligible to receive up to $20,000 in student loan forgiveness under Biden’s separate one-time student debt relief plan. That plan has been put on hold while the Supreme Court considers whether to strike it down in response to two legal challenges; a decision is expected by June.

According to separate Education Department guidance, Direct consolidation loans that contain commercially-held FFEL loans will not qualify for Biden’s one-time debt relief plan if the borrower submitted their Direct consolidation application after September 28, 2022. So, combining Direct loans with commercial FFEL loans in a new Direct consolidation loan, to benefit from the IDR Account Adjustment, could potentially close the door on that borrower receiving relief under the separate Biden debt relief initiative, if the Supreme Court allows that program to proceed.

Consolidating Parent PLUS loans with other student loans could restrict IDR eligibility

In addition, borrowers who consolidate Parent PLUS loans with other non-Parent Plus loans in their name (such as Stafford or Graduate PLUS loans they took out for their own education) could inadvertently restrict their access to IDR plans. That’s because the inclusion of the Parent PLUS loans could “taint” the Direct consolidation loan and restrict it to Income Contingent Repayment (ICR), which in most cases is far more expensive than other IDR options like IBR and SAVE (formerly REPAYE).

There may also be interest implications for borrowers to consider. Borrowers may lose any voluntary interest rate incentive associated with a commercial FFEL loan if they include it in a Direct consolidation loan. In addition, any outstanding accrued interest could be capitalized (added to the principal balance) during the consolidation process.

Bottom Line for Borrowers Considering Whether to Consolidate for Student Loan Forgiveness

While Direct loan consolidation is going to be the right move for many borrowers seeking relief through the IDR Account Adjustment, consolidating may not make sense for everyone. Borrowers should take the time to evaluate the current published guidance for the IDR Account Adjustment, Biden’s one-time debt relief plan, the IDR programs, and the typical pros and cons of consolidating, before deciding how to proceed.

Borrowers who do intend to consolidate to benefit from the IDR Account Adjustment should do so before the end of 2023, according to the Education Department.