Unconsolidate Student Loans? Maybe

#1 Student loan lawyer

Updated on May 12, 2023

Over 1 million federal student loan borrowers apply for consolidation each year, according to the Consumer Financial Protection Bureau. Consolidation is an excellent option for borrowers since it lets them combine multiple loans into one at no cost.

This can simplify repayment and potentially lower monthly payments — plus, it could also increase chances of qualifying for student loan forgiveness programs.

But what if things don’t go according to plan?

Payments increase, credit towards forgiveness is lost, or interest rates are higher than expected.

Is there any way to go back to the original repayment terms?

The answer may be yes — but only if you move quickly.

Related: How Many Times Can You Consolidate?

Can I unconsolidate student loans?

Typically, it is impossible to unconsolidate a student loan after the student loan servicer has finalized the consolidation by paying off the old loans. Once the new loan is disbursed, borrowers are stuck with the interest rate and new terms.

That recently changed, however, for 800 Americans who combined their federal student loans with a spouse under a program Congress ended decades ago.

Thanks to bipartisan efforts, the Joint Consolidation Loan Separation Act was passed into law last year, setting up an opportunity for affected borrowers to separate their loans and take advantage of Public Service Loan Forgiveness and other assistance measures taken by President Joe Biden during the pandemic.

Related: Spousal Consolidation Student Loans & Divorce

How do I unconsolidate my student loans?

Unfortunately, the U.S. Department of Education has not yet established a procedure for breaking up joint consolidation loans, even though the new law has been in effect for some time now.

The department’s resources have been taken up with processing PSLF Waiver applications, defending President Biden’s debt cancellation plan, and reviewing borrowers’ payment histories for student loan payments and time spent in deferment or forbearance to determine the qualifying payment credit they’ll get toward IDR forgiveness.

Visit Ed.gov to subscribe to the department’s newsletter to get notified when the process is released.

Related: Can You Refinance Student Loans After Consolidation?

Student loan consolidation can be stopped but not undone

Unless you’re one of the few borrowers with a Joint Consolidation Loan, you can’t reverse a consolidation that’s already been completed. But if you catch the process in progress, stopping a consolidation is an option.

As you know, the process begins on the Federal Student Aid website, StudentAid.gov, where you can select a loan servicer and choose from eligible loan types such as Federal Family Education Loans (FFEL), Parent PLUS Loans, Grad PLUS Loans, Subsidized and Unsubsidized Stafford Loans, and Federal Perkins Loans.

Related: Are FFEL Loans Eligible for Student Loan Forgiveness?

The new Federal Direct Consolidation Loan will have a fixed interest rate that’s a weighted average of the original loans’ rates, without any reductions, for the life of the loan. This may result in a slight increase in the interest rate.

Once you submit your application, the servicer will send out a Loan Verification Certificate to get payoff information from the existing loan holders.

Two weeks before the new loan is disbursed, you’ll get a Loan Summary Statement with details such as the loans included in the consolidation, the principal balance, interest rate, and estimated monthly payment under different repayment options like the Standard Repayment Plan and income-driven repayment plans.

You’ll have 10 days to review this statement and make changes if needed — which includes canceling the consolidation if desired.

To do this, contact your servicer and ask them to stop it.

Private lenders won’t let you unconsolidate

Just like the federal government’s consolidation program, private lenders won’t let you backtrack on a refinancing that’s already happened. So, if you’re not satisfied with the loan terms and the interest rate you have, your only option is to refinance again.

But, if your credit score, income, and payment history are in order, there’s a chance to secure a better deal — a lower interest rate and longer repayment term that eases the burden of monthly payments.

Related: How Often Can You Refinance Student Loans?

Bottom Line

Before you jump headfirst into consolidating or refinancing your student loan debt, remember there’s no turning back.

So take your time, understand the consequences, and be sure of what you’re getting into, especially when refinancing federal student debt into a private student loan.

It may seem like a good idea to combine your loans into a single payment or access better repayment programs or loan forgiveness options but make sure you’ve thought it through.

UP NEXT: Can You Consolidate and Still Get Student Loan Forgiveness?

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