Biden administration cuts student debt relief for millions amid legal troubles

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

Student loans guaranteed by the federal government but held by private entities represent a relatively small and shrinking subset of the outstanding federal student debt. They represent only a few million of the approximately 45 million Americans who have federal student loans.

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

Many of these businesses suffer economic losses when they lose borrowers who convert their federally guaranteed loans into new loans made directly by the Department of Education through a process called 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 Department of Education said Thursday that borrowers who have already taken these steps to qualify for loan forgiveness will still receive it. The agency said it would still provide debt relief to borrowers “who requested to be consolidated into the direct lending program by September 29, 2022.” But the department said the 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, which will enable us to achieve this goal while continuing to explore other legally available options to provide relief to borrowers with private FFEL loans. and Perkins loans. , including whether FFEL borrowers could benefit from one-time debt relief without the need to consolidate,” an Education Department spokesperson said in a statement.

Private federal student loans featured prominently in the new lawsuit filed Thursday by GOP attorneys general.

The lawsuit, filed in federal court in Missouri, is based, in part, on the theory that states are directly harmed by the Biden administration taking steps to cancel 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 holds and administers federally guaranteed student loans, suffers economic harm from the program. debt relief.

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

Some of the other states, however, argue that the entire student debt relief program — not just the federally guaranteed portion — will cause them economic harm. They claim they will suffer a loss of tax revenue due to Biden’s student debt relief program for all types of federal student loans.

The Department for Education spokesman 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 in loans held by private lenders.

Administration officials argued that the policy change would directly affect far fewer millions of borrowers, as a large portion of borrowers were never ready to receive the relief in the first place or had other means of getting relief. get relief.

Some 1.6 million borrowers with private federal student loans also have a direct loan, according to an administration official. These borrowers will still be able to get debt relief on their direct loan, the official said, although they may receive less relief overall.

Another 1.5 million borrowers with some type of private federal loan — an FFEL consolidation loan — would have had to go through a complex process to make their loans eligible for relief, according to an administration official.

Combined with an additional drop for borrowers who exceed the program’s income limits, administration officials say 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 package.

It’s unclear why the Biden administration decided on Thursday to end 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 announcement in August — of the legal complexities associated with the federal government forgiving guaranteed student loans. by the federal government.

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

Those talks have yet to result in an agreement, but the administration announced on Thursday that it would continue negotiations.

The Department of Education said on its website Thursday that it is “evaluating whether there are other avenues 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.

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