Biden administration scales back student debt relief for millions amid legal concerns

The Biden administration is scaling back its debt relief program for millions of Americans over concerns about legal challenges from the student loan industry as well as a new lawsuit from Republican-led states.

In a reversal, the Education Department said on Thursday it would no longer allow borrowers who have federal student loans that are owned by private entities to qualify for the relief program. The administration had previously said those borrowers would have a path to receive up to $10,000 or $20,000 of loan forgiveness.

The policy change comes as the Biden administration this week faces its first major legal challenges to the loan forgiveness program, which Republicans have railed against as an illegal use of executive power that is too costly for taxpayers.

On Thursday, a group of six GOP attorneys general sued to block loan forgiveness. The states of Arkansas, Iowa, Kansas, Missouri, Nebraska, and South Carolina asked a federal judge to strike down the debt cancellation program, arguing that it’s illegal and unconstitutional.

The student loans that are guaranteed by the federal government but held by private entities account for a relatively small, and shrinking, subset of all outstanding federal student debt. They comprise just several million of the roughly 45 million Americans with federal student loans.

But there are significant business interests that depend on the federally guaranteed loan program — a wide range of private lenders, banks, guaranty agencies, loan servicers and investors. That industry is widely seen, both inside and outside the administration, as presenting the greatest legal risk to the debt relief program.

Many of those companies face economic losses when they lose borrowers who convert their federally guaranteed loans into new loans that are made directly by the Education Department through a process known as consolidation.

Administration officials said when they announced the debt relief program in August that borrowers with federally guaranteed loans should consolidate their loans in order to receive loan forgiveness.

The Education Department said Thursday that borrowers who already took those steps to receive loan forgiveness would still receive it. The agency said it would still provide debt relief to borrowers “who have applied to consolidate into the Direct Loan program prior to Sept. 29, 2022.” But the department said that path is no longer available to borrowers after the new guidance.

“Our goal is to provide relief to as many eligible borrowers as quickly and easily as possible, and this will allow us to achieve that goal while we continue to explore additional legally available options to provide relief to borrowers with privately owned FFEL loans and Perkins loans, including whether FFEL borrowers could receive one-time debt relief without needing to consolidate,” an Education Department spokesperson said in a statement.

The privately held federal student loans featured prominently in the new lawsuit filed by GOP attorneys general on Thursday.

The lawsuit, filed in federal court in Missouri, is based, in part, on the theory that the states are harmed directly by the Biden administration taking steps to forgive federal student loans held by private entities.

For example, in the lawsuit, Missouri Attorney General Eric Schmitt argues that the Missouri Higher Education Loan Authority, a quasi-state entity, which owns and services federally guaranteed student loans, faces economic harm from the debt relief program.

Nebraska Attorney General Doug Peterson argues in the lawsuit that some of his state’s pension fund is invested in securities that are backed by federally guaranteed loans. The lawsuit says the Biden relief program could cut in half the size of that market and hurt the state’s investments in it.

Some of the other states, however, argue that the entire student debt relief program — not just the federally guaranteed part — will cause them economic injury. They argue they’ll face lost tax revenue as a result of Biden’s student debt relief program for all types of federal student loans.

The Education Department spokesperson said the policy change would affect "only a small percentage of borrowers.” The most recent federal data, as of June 30, shows there were 4.1 million federal borrowers with $108.8 billion of loans held by private lenders.

Administration officials argued that the policy change would directly affect far fewer than millions of borrowers because a large share of the borrowers were never set to receive the relief in the first place or have other avenues to obtain relief.

Some 1.6 million borrowers with privately held federal student loans also have a direct loan, according to an administration official. Those borrowers will still be able to obtain debt relief on their direct loan, the official said, though it is possible that they will receive less overall relief.

Another 1.5 million borrowers have a certain type of privately held federal loan — an FFEL consolidation loan — would have faced a complex process for making their loans eligible for relief, according to an administration official.

Combined with some additional drop-off for borrowers who exceed the income limits of the program, administration officials argue that only about 770,000 borrowers would be directly affected by the policy change.

Earlier this month, the Biden administration released data estimating that 42.4 million borrowers across the country would be eligible for its debt relief program.

It’s not clear why the Biden administration decided on Thursday to pull the plug on allowing the subset of federal student loan borrowers to participate in the program. Industry officials and a wide range of policy experts had long warned — even before the administration’s August announcement — about the legal complexities associated with the federal government forgiving federally guaranteed student loans.

Top Education Department officials and industry groups had for weeks been negotiating a compromise deal in which the companies were compensated for their losses and would avoid suing the administration over the issue.

Those discussions have not yet produced a deal, but the administration signaled on Thursday they would continue negotiating.

The Education Department said on its website Thursday it “is assessing whether there are alternative pathways to provide relief to borrowers with federal student loans not held by [the Education Department], including FFEL Program loans and Perkins Loans, and is discussing this with private lenders.”