The Biden administration is scaling back loan relief for millions of students amid legal concerns

On Thursday, a panel of six GOP attorneys general Sued to prevent Loan forgiveness. The states of Arkansas, Iowa, Kansas, Missouri, Nebraska and South Carolina asked a federal judge to stop the debt cancellation program, arguing it was illegal and unconstitutional.

Student loans guaranteed by the federal government but held by private institutions are a relatively small and shrinking subset of all federal student loans. They make up only several million of the roughly 45 million Americans who have federal student loans.

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

Many institutions face 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 known as consolidation.

When announcing the debt relief program in August, administration officials said borrowers with federally guaranteed loans would have to consolidate their debt in order to receive debt forgiveness.

Borrowers who have already taken those steps to get loan forgiveness will still get it, the Education Department said Thursday. Loan relief will still be offered to borrowers who “applied to consolidate into the Direct Loan program before Sept. 29, 2022,” the company said. But after the new guidelines, the borrowers will not get the route, the department said.

“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 as we continue to explore additional legally available options to provide relief to borrowers through privately owned FFEL loans and Perkins loans. including whether it can be obtained,” a Department of Education spokesperson said in a statement.

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Privately held federal student loans feature prominently in a new lawsuit filed Thursday by the GOP attorney general.

The lawsuit, filed in federal court in Missouri, is based, in part, on the theory that states will be directly affected by the Biden administration’s move to forgive federal student loans held by private companies.

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

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

Some other states, however, argue that the entire student loan relief program — not just the federally guaranteed portion — would hurt them economically. They argue that they face lost tax revenue as a result of Biden’s student loan relief plan for all types of federal student loans.

A spokeswoman for the Department of Education said the policy change would affect “only a small percentage of borrowers”. The most recent federal data showed that as of June 30, 4.1 million federal borrowers had $108.8 billion in loans held by private lenders.

Administration officials argued that the policy change would directly affect far fewer than the millions of borrowers.

About 1.6 million borrowers also have direct loans with privately held federal student loans, according to the administration. Those borrowers will still be able to receive debt relief on their direct loans, the official said, although they will receive less overall relief.

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Another 1.5 million borrowers with a specific type of privately held federal loan — an FFEL consolidation loan — will face a complicated process to make their loans eligible for relief, an administration official said.

With some additional waivers for borrowers who exceed the program’s income limits, administration officials argue that only 770,000 borrowers will be directly affected by the policy change.

Earlier this month, the Biden administration released data estimating that 42.4 million borrowers nationwide are eligible for its debt relief program.

It’s unclear why the Biden administration decided Thursday to allow a subset of federal student loan borrowers to participate in the program. Industry officials and a wide range of policy experts have long warned — even before the administration’s August announcement — about the legal problems associated with the federal government forgiving federally guaranteed student loans.

Higher education officials and industry groups have spent weeks negotiating a compromise deal in which institutions are compensated for their losses and don’t sue the administration over it.

Those discussions have yet to produce a deal, but the administration signaled on Thursday that it would continue negotiations.

The Department of Education said on its website Thursday that it is “evaluating whether there are alternatives to providing relief to borrowers.” [the Education Department]FFEL discusses this with private lenders, including Project Loans and Perkins Loans.

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