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Source: The College Investor
Spousal consolidation student loans were offered until 2009 – when Congress finally realized that this was actually a terrible idea. To date, there are fewer than 1,000 victims of spousal student loan consolidation.
I'll briefly explain what spousal student loan consolidation is, why you might want to do it, why you might want to avoid it, and how to change it if you have such a loan.
Note: The federal government has ended the spousal loan consolidation program. In September 2022, Congress passed and President Biden signed a law allowing couples to separate their spousal consolidation loans.
In October 2024, the application process for separation of spousal consolidation loans was finally released.
What is Spousal Student Loan Consolidation?
Spousal student loan consolidation involves combining your student loans and your spouse's into a joint loan that bears both of your names. This process was previously offered by the government for federal loans. While it is no longer possible to consolidate your federal student loans with your spouse, many people did so when the program was available and are still paying off those loans, for better or worse.
However, some private lenders will consolidate a married couple's loans, even though the process would technically be considered a refinance. The two loans would be repaid with a single new loan in both your name and your spouse's name. Some lenders may include federal loans in the consolidation; Keep in mind, however, that refinancing federal loans into private loans removes the myriad of borrower protections—repayment and forgiveness options, as well as deferment, forbearance, and interest rate benefits—that come with federal loans.
If you have federal student loans and are considering combining your and your spouse's loans into a private joint loan, consider your other options first. If you need lower payments, you may want to keep your federal loans and enter into a different repayment plan that better fits your income level.
The benefits
A private spousal consolidation loan can simplify your life if you and your spouse have a confusing or unfavorable student loan landscape. By this I mean you and your spouse:
If some or all of these statements are true, consolidating your loans into a single loan might seem attractive. However, you may want to consider refinancing your loans separately before choosing a spousal consolidation loan.
Only if your credit score and income combined would give you the most favorable loan terms and interest savings should you consider a spousal consolidation loan.
The disadvantages
With a spousal consolidation loan, you are making a financial commitment to your spouse that will be very difficult or costly to get out of, especially if you decide to divorce. If you have a true joint loan, you and your spouse are equal debtors on that debt and are equally liable, regardless of how much debt you originally owed.
You cannot reveal someone's name on a joint loan. If you and your spouse have a loan where one of you is a cosigner, you can theoretically release a cosigner, but lenders aren't always willing to do this.
The main disadvantage is the unpredictability of your financial situation and your relationship. If one or both of them change, you will need to negotiate with your spouse about how to repay this total debt.
How to Separate Your Spousal Consolidation Loan
The process for separating a spousal consolidation loan occurs in two phases.
First, borrowers must complete the Combined Joint Consolidation Loan Separation Application and the Direct Consolidation Loan Promissory Note Application.
This application consists of several parts and you must ensure that you complete them properly. There are three main reasons for a breakup:
- Joint agreement in which you and your spouse (or former spouse) agree to divide your loans based on your original balance percentage.
- A joint agreement resulting from a divorce or separation whereby you and your former spouse separate your loans based on a settlement agreement
- Separate application to separate your loans if a spouse is attempting to separate their loans due to economic abuse or domestic violence, or the Department of Education allows it for “other reasons.” This is not as clearly defined, but you should still apply if necessary.
This is important – you and your co-borrower must both complete applications for reasons #1 and #2. This is set out here:
IMPORTANT: Regardless of which option you choose to separate your joint consolidation loan, the co-borrower will not sign your application/promissory note. If you and the co-borrower both wish to separate the joint consolidation loan (as indicated by checking item 18 or item 19 in Section 10), you must each submit your own application/promissory note and check the same item in Section 10.
Once you have both completed the application, mail the completed application(s), along with a copy of the divorce decree if necessary, to the appropriate address:
Auxiliary benefit
ATTN: ED Loan Consolidation
PO Box 300005
Greenville, TX 75403-3005
Edfinancial
C/O Aidvantage
PO Box 300008
Greenville, TX 75403-3008
A model
C/O Aidvantage
PO Box 300006
Greenville, TX 75403-3006
Waiting for phase II
Once you submit your application, there is no timeline for “Phase II” or the actual separation of your loan. In Phase II, a new loan is created for each spouse and then the necessary documents are sent to them.
However, this phase was not announced in terms of timing.
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