Congress Approves Bill To Allow Spousal Consolidation Loans to be Split, Paving the Way for Student Loan Forgiveness Eligibility

This week, Congress passed landmark legislation that will provide long-overdue relief for borrowers with a particularly problematic kind of student loan. The legislation now heads to President Biden's desk for his signature.

Here’s an overview.

Spousal consolidation loans can be a nightmare

Until 2006, federal law authorized a peculiar kind of federal consolidation loan where spouses could combine their respective balances into a single loan. “Joint” or “Spousal” consolidation loans, as they were called, were envisioned as a way for married borrowers to manage their student loans better and combine their resources.

But because both spouses are jointly and severally liable (legalese for “responsible”) for the entire spousal consolidation loan balance, regardless of their respective contributions, borrowers who were approved for these loans started encountering problems.

For example, if the married borrowers divorced, the spousal consolidation loan could not be split up — forcing the now ex-spouses to continue to be responsible for each other's debt, no matter what a state divorce court decreed. This was particularly troubling for borrowers who were victims of domestic violence. The federal government discontinued the program in 2006.

But the problems did not end there. As new federal student loan programs were rolled out, many of which were limited to Direct federal student loans only, borrowers with Spousal FFEL Consolidation loans were left out.

While most FFEL loans can be consolidated into a Direct loan to qualify for certain relief programs like Public Service Loan Forgiveness (PSLF) or Revised Pay As You Earn (REPAYE), the Education Department does not allow FFEL Consolidation loans to be re-consolidated because of the joint borrower liability.

Direct consolidation loans can only have one borrower or signer. The Education Department repeatedly indicated that Congress would have to pass legislation to change federal law.

The problem has only become more urgent as the Biden administration rolls out the new one-time debt cancellation initiative, allowing up to $20,000 in student loan forgiveness for an estimated 40 million borrowers.

Congress passes legislation to split spousal consolidation loans

On Wednesday, the House passed the Joint Consolidation Loan Separation Act of 2021, allowing these spousal loans to be split between the two borrowers. The Senate had already passed the bill several months ago. The legislation now heads to President Biden, who is expected to sign the bill into law in the coming days.

The bill will allow borrowers with joint spousal consolidation loans to apply to sever the loans for a variety of reasons, including accessing federal programs like Public Service Loan Forgiveness (PSLF), effectively allowing them to consolidate their respective individual balances into the Direct loan program under their own name if they choose.

“By finally allowing individuals to sever their joint consolidation loans, this bill will provide needed respite to vulnerable individuals who are being unfairly held responsible for the debt of a former partner,” said Senator Mark Warner (D-VA) in June when the Senate passed its version of the bill.

Advocacy groups quickly praised the new legislation.

“We applaud Congress’s long overdue decision to create a path to separate spousal consolidation loans, said Kyra Taylor, student loan staff attorney at the National Consumer Law Center, in a statement.

“Congress stopped allowing married borrowers to consolidate all of their loans into joint consolidation loans over 15 years ago but did not provide a vehicle for borrowers with those loans to undo the consolidation. As a result, borrowers with these obsolete loan types faced difficulty or were ineligible for new relief programs created in the years since, like Public Service Loan Forgiveness. Spousal consolidation loans have been a terrible burden for borrowers who have since divorced or been subject to domestic abuse, as these loans financially handcuff them to their former spouses or abusers.”

“For far too long, these Spousal Consolidation Loans have locked spouses together financially even in the case of domestic abuse or divorce,” said Student Borrower Protection Center deputy executive director Persis Yu, in a statement.

“Passage of the Joint Consolidation Loan Separation Act brings an end to the decades-long saga and provides a light at the end of the tunnel for struggling borrowers—including survivors of domestic and economic abuse—who have been trapped by these joint loans. We urge the President to sign this bill into law immediately.”

What’s next for borrowers with spousal consolidation loans?

President Biden must first sign the bill for it to become law. Then, the Education Department must develop a process to implement the new separation option.

Timing will be tight for borrowers. Advocacy groups have been pushing the Education Department to extend this deadline, but so far, there are no indications that this will happen.

“We hope that the Department of Education works expediently to implement these changes,” said Taylor.