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

The Biden administration is curtailing its sweeping student debt relief program for several million Americans whose federal student loans are owned by private companies over concerns the industry would challenge it in court.

The Education Department will no longer allow borrowers with privately held federal student loans to receive loan forgiveness under the administration’s plan, according to guidance updated on the agency’s website Thursday. The administration had previously said that those debt-holders would have a path to receive the administration's relief of $10,000 or $20,000 per borrower.

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

The federal student loans held by private entities — through a program known as the Federal Family Education Loan program — is a relatively small subset of outstanding federal student loans. It accounts for just several million of the 45 million Americans who owe federal student loans.

But the business interests that surround the program — a collection of private lenders, guaranty agencies, loan servicers and investors of the loans — make the federally guaranteed loan program an outsized legal threat to the administration.

Private lenders and other entities that participate in the federally guaranteed student loan program are widely seen, both inside and outside the administration, as presenting the greatest legal threat to the program.

Many of those companies face losses as borrowers convert their privately held federal student loans into ones that are owned 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 held by private lenders would be able to receive loan forgiveness by consolidating their debt into a new loan made directly by the Education Department.

The agency said Thursday that borrowers who already took those steps to receive loan forgiveness would still receive it. But the Education 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 spokesperson said that the policy change would affect "only a small percentage of borrowers" but did not immediately provide any new data. The most recent federal data, as of June 30, shows there were more than 4 million federal borrowers with $108.8 billion of loans held by private lenders.

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. The Education Department has declined to say whether that total includes federal student loan borrowers with privately held debt.

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 avoid suing the administration over the issue. But those discussions have not yet produced a deal.

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.”