The debt relief program for millions of Americans is being scaled back due to legal challenges from the student loan industry and a new lawsuit from Republican states.

The Education Department said on Thursday that it would no longer allow borrowers with federal student loans that are owned by private entities to qualify for the relief program. The administration had previously said those borrowers would be able to get up to $20,000 of loan forgiveness.

As the Biden administration 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, a policy change has been made.

A group of GOP attorneys general are trying to stop loan forgiveness. The states of Arkansas, Iowa, Kansas, Missouri, Nebraska, and South Carolina argued that the debt cancellation program is unconstitutional.

The student loans that are guaranteed by the federal government but held by private entities account for a small portion of federal student debt. Roughly 45 million people have federal student loans.

There are significant business interests that depend on the federal government guaranteeing loans. The debt relief program's greatest legal risk is presented by that industry.

Many companies face economic losses when they lose borrowers who convert their federally guaranteed loans into new loans through a process known as consolidation.

When the debt relief program was announced in August, administration officials said that borrowers with federal guaranteed loans should consolidate their loans.

The Education Department said borrowers who already took the steps to get loan forgiveness would get it. Debt relief will be provided to borrowers who have applied to consolidate into the Direct Loan program before Sept. 29, 2022, according to the agency. The path is no longer available to borrowers, according to the department.

The 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 explore additional legally available options to provide relief to borrowers with privately owned FFEL loans and Perkins loans.

The lawsuit was filed by GOP attorneys general on Thursday.

The lawsuit is based on the idea that the states are harmed by the Biden administration taking steps to forgive federal student loans held by private entities.

In the lawsuit, the Missouri Attorney General argues that the Missouri Higher Education Loan Authority faces economic harm from the debt relief program.

Some of the pension fund in Nebraska is invested in securities that are backed by federal loans, according to the lawsuit. According to the lawsuit, the Biden relief program could hurt the state's investments in that market.

The entire student debt relief program will cause economic injury for some states. They argue that they will lose tax revenue because of Biden's student debt relief program.

A small percentage of borrowers will be affected by the policy change. There are 4.1 million federal borrowers with $108.6 billion of loans held by private lenders.

Administration officials argued that the policy change wouldn't affect millions of borrowers because a lot of them weren't going to get relief in the first place.

An administration official said that 1.6 million borrowers with private student loans have a direct loan. The official said that the borrowers would still be able to get debt relief on their direct loan.

An FFEL consolidation loan is one of the types of privately held federal loans that could have made them eligible for relief.

Administration officials say that only about 770,000 borrowers would be affected by the policy change.

Data was released by the Biden administration estimating the number of people who would be eligible for debt relief.

It is not clear why the Biden administration pulled the plug on allowing the subset of federal student loan borrowers to take part in the program. Industry officials and a wide range of policy experts have been warning about the legal issues associated with federal student loan forgiveness for years.

The companies were compensated for their losses in a compromise deal that would have avoided a lawsuit against the administration.

The administration said on Thursday that they would continue negotiations.

The Education Department said on its website that it is assessing whether there are alternative pathways to provide relief to borrowers with federal student loans not held by the Education Department.

  • Milwaukee Journal Sentinel
  • AZCentral | The Arizona Republic