In a remarkable U-turn that will affect the fortunes of millions of student borrowers, the US Department of Education has quietly changed its guidelines for who is eligible for President Biden’s sweeping student debt relief package.
At the center of the change are borrowers who took out federal student loans many years ago, both Perkins loans and federal home education loans. FFEL loans, issued and operated by private banks but guaranteed by the federal government, were once the mainstay of the federal student loan program until the FFEL program ended in 2010.
Today, according to federal data, more than 4 million borrowers still have FFEL loans held by businesses. Until Thursday, the department’s website advised those borrowers that they could consolidate those loans into direct federal loans and thus receive relief under Biden’s debt cancellation program.
On Thursday, however, the ministry quietly changed that language. The guidelines now state, “Effective September 29, 2022, borrowers with federal student loans not held by ED cannot obtain one-time debt relief by consolidating those loans into direct loans.”
It is unclear why the ministry reversed its decision to allow FFEL borrowers with corporate-held loans to consolidate and then qualify for debt relief.
In a statement to NPR, a spokesperson for the department said, “Our goal is to provide relief to as many eligible borrowers as quickly and easily as possible, and this will enable us to achieve that goal while continuing to explore other legally available options for providing relief to borrowers with FFEL loans and private Perkins loans, including whether FFEL borrowers could receive one-time debt relief without the need to consolidate. Borrowers with private federal student loans who asked to consolidate their loans into direct loans before September 29, 2022 will get one-time debt relief. The FFEL program is now lapsed and only a small percentage of borrowers have FFEL loans.”
The tell in this statement is “legally available”.
Several legal experts told NPR that the policy reversal was likely prompted by concerns that the private banks that service the old FFEL loans could potentially sue to stop debt relief, arguing that Biden’s plan would cause them financial harm.
When FFEL borrowers consolidate their old loans into Federal Direct Loans, these private banks essentially lose business. If the financial health of these banks depends, at least in part, on the assumption that they hold and benefit from these long-term debts, then losing borrowers to Biden’s debt relief plan could possibly constitute a harm.
In reality, a new trial filed Thursday by six state attorneys general, makes that argument. One of the plaintiffs, Missouri, is home to MOHELA, which handles both federal direct loans and these former FFEL program loans.
“The consolidation of MOHELA’s FFELP loans harms the entity by depriving it of an asset (the FFELP loans themselves) that it currently owns,” the complaint states. “The consolidation of MOHELA’s FFELP loans harms the entity by depriving it of the ongoing interest payments that these loans generate.”
In response to the lawsuit, Persis Yu of the Student Borrower Protection Center said, “FFEL lenders have shown their true colors. Instead of working in the interest of student borrowers – their clients – these lenders are holding millions of borrowers hostage in order to continue making money from the suffering borrowers. »
Changing policy now and limiting the number of FFEL borrowers who can potentially qualify for debt relief could make those FFEL banks less likely to legally oppose debt relief.