For student-loan borrowers who combined their balances with a spouse, recent guidance has just been released on how to go about separating those loans, and it’s important to understand how it may impact your financial future.

In September 2021, the Joint Consolidation Loan Separation Act was signed into law, permitting borrowers in the spousal joint consolidation loan program to separate their combined balances. The program, initially designed to make monthly student-loan payments more affordable with a single interest rate, was discontinued in 2006, and the law had previously prohibited the separation of combined balances.

This change brings relief to borrowers who may have divorced or been in abusive relationships, allowing them to independently repay their loans. Additionally, separating loan balances is beneficial for government and nonprofit workers seeking to enroll in the Public Service Loan Forgiveness (PSLF) program, which requires the separation of loans into the direct loan program to qualify for relief.

The Federal Student Aid (FSA) website recently provided new guidance outlining the process for borrowers to separate their balances. Here’s what you should know:

Applying to Separate Loan Balances

Borrowers can apply for loan separation using two methods:

1. Joint Application: Both co-borrowers must submit an application requesting the separation of their loans into new direct loans. The separation will not proceed until both borrowers have submitted their applications.
2. Separate Application: One co-borrower can apply for loan separation independently. The applicant’s portion of the debt will be converted into a direct loan, while the non-applicant will be responsible for the original combined loan’s remaining balance. This option is only permitted if the applicant certifies they have been a victim of domestic violence or economic abuse, or if the FSA determines it would be in the best fiscal interest of the federal government.

Timeline for the Separation Process

The FSA website notes that the separation process is under development and will not be fully implemented until late 2024 at the earliest.

Immediate Actions for Borrowers

The FSA recommends borrowers contact the FSA Ombudsman Group to express their intention to apply for loan separation when the application becomes available.

Eligibility for IDR and PSLF Adjustments

Last year, the Education Department announced one-time account adjustments for borrowers on income-driven repayment (IDR) plans and those in the PSLF program to ensure their payments are up to date. According to the FSA, borrowers with direct joint consolidation loans will receive these adjustments, and loan separation is not required.

For borrowers in the Federal Family Education Loan (FFEL) Program with joint consolidation loans, taking the necessary steps to separate their loans will still allow them to receive account adjustments, even if the separation application is not available until after the adjustments occur. In such cases, benefits will be applied retroactively.