How To Maximize Your Loans Under the Double Consolidation Loophole
In this article, I will explain how to maximize Parent PLUS loans under the Double Consolidation Loophole.
We discuss strategies to separate loans for optimal consolidation, the importance of timing before the loophole closes, and the repayment plans available. You should act before deadlines to benefit from this loophole.
Summary:
Understanding the loophole
Tips for maximizing loans
Separating current year's loans
Consolidation process
Example repayment calculation
👉🏼 Okay, so, you have a child(ren) currently enrolled in school and you still have a year or three left of taking out Parent PLUS loans.
👉🏼 You've also heard about the Double Consolidation Loophole, and you want to pursue that as a strategy.
👉🏼 But you might be wondering; how do you maximize the amount of loans that I can get under this loophole? Maybe, you’re even worried that if you can’t get every year of Parent PLUS loans into the Double Consolidation Loophole, maybe you shouldn't even bother…
👉🏼 If all those thoughts are swirling in your mind, this article is for you. 👈🏼
Okay, you already have Parent PLUS loans taken out, your child or children are currently enrolled for the 24-25 academic school year, and there's a year or more left after this academic school year in which you must take out Parent PLUS loans.
We know that the Double Consolidation Loophole can unlock massive benefits for parents that have large amounts of Parent PLUS loan debt in their names.
But wait, you may have also heard that there is a deadline for the loophole closing, which is set for July 1st of 2025. It’s important to note, the loophole might not actually close! Read more here – SAVE Legal Challenges Blog
Currently, the rule that would close the loophole has an injunction on it and is in jeopardy of being struck down. In theory, if the rule is completely struck down, the loophole could remain in place for at least some time longer.
But for purposes of our discussion here, let's assume that the loophole will close on July 1st of 2025.
How do we get as much of your loans under this loophole as possible & why is it important to even do this?
First, let’s consider that when your Federal student loan balance is very large (think, higher than your income), it can make a lot of sense to pursue loan forgiveness. And when you pursue loan forgiveness, one of the criteria requires you to be on an income-driven repayment plan, or IDR (and there are 4 of these).
However, Parent PLUS loans in and of themselves don’t qualify for any IDR. You must consolidate these loans to be eligible for an IDR. But if you consolidate all these loans at once, then your only option is ICR, Income Contingent Repayment. This is a highly restrictive payment, requiring 20% of your income, after a deduction is taken into account based on your family size.
For most people, ICR creates an unaffordable payment that makes loan forgiveness unattainable.
👉🏼 Enter the double consolidation loophole. Utilizing this loophole (follow my guide for specific steps) allows you to sidestep ICR and become eligible for the other income-driven repayment plans. This makes for a much more manageable payment, most of the time based on 10% of income, and usually less than half of what the payment would be on the ICR plan.
When pursuing forgiveness, you really want to make sure you pay as little as possible to your student loans, and one way to do that is to take advantage of this loophole.
But what happens when you have a child or children that are currently in school? With a process that takes several months and the loophole scheduled to close on July 1st, 2025, how can you get as much of your Parent PLUS loans through the loophole as possible? And what about the loans that you will take out after the loophole closes?
Double consolidation can still be the answer, even if some of your eventual loans fall outside of this loophole. The goal is to get as much of your loans through the loophole as possible now, which will lower your overall loan payment down the road.
The process of maximizing the Double Consolidation Loophole:
First, separate each semester’s portion into its own loan for this current academic school year.
Most Parent PLUS loans for an academic school year come as one entire loan, broken out into two disbursements (fall and spring).
The issue here is two-fold. First, you cannot consolidate a Parent PLUS Loan if there's an amount yet to be disbursed, so you wouldn't be able to add any portion of this year's Parent PLUS Loan in the double consolidation until the spring portion disburses.
This brings us to the second issue. Most loans for the spring semester are disbursed in early-mid January. Also, this process can take six months to complete. If you wait to start the entire process after the spring loan disburses, this doesn’t leave enough time to finish the double consolidation if there’s a hiccup in the process. The final consolidation loan needs to be disbursed by July 1, 2025 to count under this loophole.
Better to split each semester into its own individual loan and start before the end of the year. This will give you a high level of assurance that at least the fall piece will get through, even if there’s a hiccup with the spring loan.
Because of that timeline, we want to get started on this by December 2024 at the latest.
So, you want to separate out that current academic year loan into two separate pieces, a loan for fall and a loan for spring. You will try to get the spring loan into the double consolidation, but you don't want to put all your eggs in one basket hoping and waiting until that final piece disburses.
Okay, so how do you separate out your loans into two pieces?
The first step here is to call the school’s financial aid department and ask if you can split the loans in two.
⚠️ It is important to ask the financial aid department how they want you to go about doing this, because schools can have different processes for how they want this done. You don't want to end up with any further hassles than what you're already dealing with.
Typically, however, once you receive the funds for the fall, decline the undisbursed funds for the remaining part of the academic school year.
This results in the fall loan becoming its own separate loan. Later in the semester (mid-October onward), you will re-request a Parent PLUS loan for the spring semester. This will be disbursed in January (sometimes February), and this will arrive as its own individual loan as well.
Splitting these pieces into separate loans will help you get as much of your loans as possible through the double consolidation process.
However, if you don't want to go through the effort of separating this year's loans, you can start the process with the current Parent PLUS loans that you have, minus the loan for this academic school year.
Phew, okay! Now that you have the loans separated into fall and spring, move forward with the double consolidation process.
Sometime before December 2024, you will start the double consolidation process. This is divided into two rounds (hence the name). There are two consolidations done in the first round and one final consolidation in the second round.
The round 1 consolidations should finish sometime before the end of the year or early in 2025.
Then, once the spring loan disburses, hopefully sometime in January, you can add the loan to one of the consolidations using this Request to Add Loans form. Rather than starting a brand new consolidation with the spring loan, there's a feature with consolidation loans that allows you to add a loan/loans within 180 days, effectively 6 months, of the consolidation. This is typically quicker than a brand new consolidation anyway.
The goal is to be done with the first round before mid April.
So, if the spring semester loan gets added by mid April, you're good.
If it doesn't, you can cancel the process of adding the spring loan by calling the loan servicer processing the consolidation. You will just move on to round two with the consolidation loans you have and let the spring loan remain as a Parent PLUS loan.
If you submit the ‘round two’ consolidation application by mid April, you will be in good shape.
The round two, or final, consolidation is usually the easier of the two steps. Once the application for consolidation is submitted, you’ll wait until the final consolidation completes.
Okay, we've gotten as much of the loans in as possible under the July 1st deadline. Now, what do payments look like when you have loans under double consolidation, yet will continue taking out Parent PLUS loans in the future?
First off, it's important to know once you’ve consolidated your loans, you will be expected to start repayment. You don't get the Parent PLUS loan deferment option that you get with Parent PLUS loans.
However, you can request a forbearance if you don't want to enter repayment yet. You get a total of three years of eligibility to use forbearance. This should get you past, or close to, the disbursement of your final Parent PLUS loan.
Speaking of which, let's fast forward a little bit. Let's say that you have…
A “double consolidation” loan that is eligible for one of the more favorable IDR plans (we’ll use Income-Based Repayment, or IBR, as the example here)…
And your child has graduated, so you have a group of Parent PLUS loans that [once consolidated] only qualify for ICR.
What does repayment look like if you want to pursue loan forgiveness?
With one portion of loans eligible for IBR with a 10%-of-income payment and another portion eligible for a 20%-of-income payment, you may be concerned that you will end up paying 30% of their income.
This is not the case.
You will end up with a blend of the two rates, with the final payment weighted on the proportion of each loan to the overall balance.
Let's walk through an example of what this looks like…
Allison is 54 and has an income of $90,000. Additionally, due to her ability to contribute the maximum amount to her 403b, she can reduce her adjusted gross income on her tax return to $60,000. Adjusted gross income, or AGI, is what we’ll start with for calculating her loan payment.
In terms of Federal student loans, Allison has a $90,000 consolidation loan that utilized the Double Consolidation Loophole, and a $90,000 consolidation loan that wasn't included under the Double Consolidation Loophole. As a result, 50% of Allison’s loan balance is eligible for IBR (10%-of-income), while the other 50% is only eligible for ICR (20%-of-income).
First, Allison uses her AGI to calculate the overall payment on each plan:
Overall IBR payment = $312
Overall ICR payment = $749
Next, Allison calculates each payment based on the loans’ proportion of the overall total:
IBR payment of $312 x 50% of total balance = $156
ICR payment of $749 x 50% of total balance = $375
Finally, Allison adds the two pieces together to get a total payment of $531
While every borrower's payment will be different based on each individual’s income level and student loan balances, the important thing to note is that the payment is a blend of the two repayment plans. It is not cumulative.
Astute observers may notice that the overall ICR payment is more than twice the IBR payment despite ICR being 20% of income while IBR is 10% of income. This is due to a deduction being applied to AGI to find what is known as “Discretionary Income”. The deduction is less with ICR, resulting in a higher payment.
Another important concept to keep in mind is that the higher the proportion of your loans that you can get through the double consolidation loophole, the higher the proportion will be on the more favorable IDR plans. This results in an overall lower payment, making it worth your while to try to maximize the amount you can squeeze through the loophole.
Last but not least, as we’ve talked about: even though you may not get every loan through double consolidation, it is still worth getting on ICR for the non-double-consolidation-loophole loans, as these are still eligible for loan forgiveness as well!
My job is to make this as simple as possible for you. Don’t hesitate to book time with me so we can go through this together.
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