Education Department Quietly Excludes Subset of Student Loans From Relief Plan

Investing News

On Sept 29, 2022, the United States Department of Education updated the guidance for the Biden administration’s student loan forgiveness plan. Under the updated policy, borrowers with privately held federal student loans are no longer eligible to receive loan forgiveness.

Here’s what to know.

Key Takeaways

  • Borrowers with federal student loans not held by the Education Department, specifically privately held Federal Family Education Loans (FFELs) and Perkins loans, will be ineligible for one-time debt relief.
  • According to NPR, a Biden administration official estimated that roughly 800,000 borrowers would be directly affected by this change.
  • The Education Department hasn’t issued an official statement explaining this change, but legal experts have hypothesized that it may have been done to appease private lenders managing old FFELs.

Federal Family Education Loans & Perkins Loans Are Out

Back in August 2022, President Biden announced his three-part plan to issue broad student loan forgiveness for low- to middle-income borrowers. In a press release, the administration disclosed that eligible borrowers with an individual annual income of less than $125,000 (or $250,000 for married couples) would receive up to $10,000 in debt cancelation, while Pell Grant recipients would receive up to $10,000 in additional student loan forgiveness.

According to the recently updated Federal Student Aid website, borrowers with federal student loans not held by the Education Department can no longer obtain one-time debt relief by consolidating their loans into direct loans. Before today, the same webpage stated borrowers with privately held federal student loans would be able to receive this relief so long as they consolidated their loans into the Federal Direct Loan Program (FDLP).

As a result of this reversal, borrowers with Federal Family Education Loans (FFELs) and Perkins loans not held by the Education Department will no longer be eligible for loan forgiveness once it rolls out, unless they applied to consolidated their loans prior to September 29. Speaking with NPR, a Biden administration official stated approximately 800,000 borrowers would be directly affected by this change.

Private Lenders Pressure Student Debt Relief

The U.S. Department of Education has yet to issue an official statement as to what prompted this change. According to the Federal Student Aid website, “[The Education Department] 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.”

The prevailing hypothesis is that private banks may file a lawsuit to try and block Biden’s debt relief. The reason for this would be that these private lenders stand to lose business if FFEL borrowers consolidate their old loans into federal direct ones.

Opponents of the Biden administration’s plan have been arguing that forgiving huge swaths of student debt would constitute financial harm for the commercial entities that manage these loans. A lawsuit filed earlier today is trying to prove just that for the Missouri Higher Education Loan Authority (MOHELA), which manages old FFELs. As such, it’s possible that the administration’s hope is that they will face fewer legal challenges from private lenders by reducing the number of FFEL borrowers who can qualify for debt cancelation.

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