The double consolidation loophole is a way for parent borrowers to make their loans eligible for the improved repayment terms available under the Biden administration’s SAVE program. This can lower monthly payments for a qualifying household significantly, as the SAVE program offers more generous income-based repayment options than Parent PLUS Loans. However, the window of opportunity is short. It takes several months to process all of the paperwork involved, and the Department of Education intends to close this loophole effective July 1, 2025. If you qualify, it’s important to act fast. Here’s what you need to know.
If you need help saving for college, a financial advisor can help you create a personalized plan.
What Are Parent PLUS Loans?
Parent PLUS loans are also known as Direct PLUS Loans for parents. With this type of loan, a parent can borrow money to pay for their child’s college education. It is available to biological, adoptive or step-parents with a child enrolled in an undergraduate program. For loans disbursed between July 1, 2023 and July 1, 2024, the fixed interest rate for the life of the loan is 8.05%.
One way Parent PLUS borrowers could repay their loans is by becoming eligible for an income-contingent repayment (ICR) plan, which is a federal student loan repayment plan that determines the borrower’s monthly payment amount based on income, family size and the total amount of their eligible federal student loans. This requires the borrower to pay 20% of their income above the federal poverty line.
By contrast, through the recent SAVE program, student borrowers can access a program called Income Driven Repayment (IDR). This allows them to repay 10% of their income over 225% of the poverty line.
To see the difference, let’s take someone making $40,000 per year. In 2024 the federal poverty line for an individual $15,060. Under SAVE, this person would pay $611 per year ($40,000 – 2.25*$15,060 = $6,115 * 0.1 = $611). And under a Parent PLUS ICR program, this person would pay $4,988 per year ($40,000 – $15,060 = $24,940 * 0.2 = $4,988).
What Is the Double Consolidation Loophole?
The double consolidation loophole is an opportunity for Parent PLUS borrowers to get the benefits of the SAVE program. This opportunity exists because of a quirk of wording in the SAVE legislation and limits on Department of Education data gathering.
If you consolidate your federal student loans once, you are left with what is known as a Direct Consolidated Loan. A consolidated Parent PLUS Loan is not eligible for SAVE terms, although it is eligible for income-contingent repayment.
However, consolidated educational loans are eligible for the SAVE program. So, borrowers can consolidate their loans for a second time (double consolidation). The new loan is a consolidated Direct Consolidation Loan, not a consolidated Parent PLUS Loan. By changing the source of the lending you change its eligibility for the SAVE program.
This is a loophole, to be sure. In fact, the government chose to omit Parent PLUS Loans from income driven repayment options. But the Department of Education has so far specifically declined to declare that applicants cannot currently use the double consolidation loophole. As long as you are honest on all applications, you can legitimately apply for SAVE (some government websites have instructions on how to do this.)
To use this loophole, you must hold at a Parent PLUS Loan and at least one other federal student loan. If you have only one Parent PLUS Loan and no other borrowing, you cannot do this.
How to Use the Double Consolidation Loophole
There are a few steps to using this loophole. In all cases it is extremely important that you use paper applications. If you use an online application, the system will automatically merge your requests and may include your loan history. This can invalidate your application. The details will differ based on your loan processor and how you handle your finances.
You Have Multiple Parent PLUS Loans
This is the process if you have multiple Parent PLUS Loans and no other eligible student borrowing:
- First, select two different student loan servicers.
- Second, request paper consolidation forms from each servicer.
- Third, review your Parent PLUS Loans and sort them into two separate groups.
- Fourth, apply to consolidate one group of loans with one servicer and the other group of loans with the second servicer. Once this is done, you will have two Direct Consolidation Loans.
- Fifth, download another paper consolidation form from the loan servicer of your choice. Apply to consolidate your two Direct Consolidation Loans.
- Sixth, full out an application for income-driven repayment based on this new Direct Consolidation Loan.
You Have a Parent PLUS Loan and Another Loan
This is the process if you have one Parent PLUS Loan and another eligible federal loan. The other loan must already be a consolidated loan. If it is not, you must consolidate it first:
- First, a student loan servicer.
- Second, request paper consolidation forms from this servicer.
- Third, apply to consolidate your Parent PLUS Loan. Once it is done, you will have a Direct Consolidation Loan and a Consolidated Loan.
- Fourth, download another paper consolidation form from the loan servicer of your choice. Apply to consolidate your two existing loans.
- Sixth, full out an application for income-driven repayment based on this new Direct Consolidation Loan.
Again, this process can take several months from start to finish, particularly because you need to do it all on paper. The program ends in 2025, so if you think you might be eligible you should begin applying now.
Bottom Line
The double consolidation loophole is a way of making your Parent PLUS Loans eligible for the generous repayment terms of the SAVE program. You can do this by changing the source of your loan through multiple consolidations, changing it from an ineligible Parent PLUS Loan to an eligible Direct Consolidation Loan.
Tips for Managing Student Loans
- It’s no secret that getting a degree has grown more expensive in recent years. For many students, the only way to keep up with rising costs has been by taking on an increasing amount of student loans. SmartAsset’s student loan calculator can help you estimate how long it will take you to pay those loans off.
- A financial advisor can help you build a comprehensive savings plan to pay for the education of your loved ones. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
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