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WASHINGTON — Hundreds of thousands of borrowers could be shut out of the student debt relief promised by President Biden after the Education Department announced that privately held loans will not be forgiven.
The department had said it was assessing whether to offer some debt relief to borrowers with federal student loans held by private entities. In the meantime, it had advised borrowers with Federal Family Education Loans or Perkins Loans that they could consolidate their debt into the federal Direct Loan program to qualify for relief, and had until the end of 2023 to do so.
But the department changed its guidance Thursday, saying that only borrowers who had applied to consolidate into the Direct Loan program by that day would be eligible for the broad relief program.
An administration official said the change could affect 770,000 borrowers, but some earlier estimates pegged the number higher.
The decision could help fend off legal challenges to the debt relief plan, which would forgive up to $20,000 in student debt for tens of millions of borrowers and has been cheered as a lifeline for people burdened by massive college loans — and drawn sharp attacks from critics who say it is too costly or unfair.
The change, first reported by Politico, comes as the Biden administration faces at least three lawsuits against the program.
The administration has maintained that the president has the authority to cancel student debt, but many critics contest that.
On Tuesday, an attorney in Indiana filed a lawsuit seeking to reverse the policy. On Thursday, two lawsuits were filed by Republican-led states, including Iowa, asking the court for immediate action to stop the administration from canceling loan balances.
The states' suits said the forgiveness plan is unconstitutional and would harm state revenue. Missouri's and Arkansas' student-loan servicers could see a drop in revenue, for example, if borrowers with FFELs consolidated into the Direct Loan program, or if the administration made those loans eligible for relief, according to the complaint filed jointly by those states and the four others.
The complaint says that most of the debt relief will go to those in the top 60 percent of income distribution, and that "none of the benefit will accrue to those who worked and paid their debt."
On Thursday, White House spokesman Abdullah Hasan said, "Republican officials from these states are standing with special interests, and fighting to stop relief for borrowers buried under mountains of debt."
The administration plan would cancel up to $20,000 for those who received federal Pell Grants, or up to $10,000 in federal student loan debt for borrowers who earn less than $125,000 a year, or are married and jointly earn less than $250,000 annually.
Borrowers with private loans do not qualify for forgiveness. Those with FFELs, which originated through a defunct federal program but are now commercially held, have not been eligible for past student loan relief programs, including the pandemic-era payment pause.
On its website, the Education Department still says it is "assessing whether there are alternative pathways" to provide relief for borrowers with federal student loans not held by the agency, and discussing that with private lenders. But for now, consolidation is no longer an option — a change that has created frustration and confusion for some borrowers.
"I feel like I went through the all the stages of grief over this yesterday," said Betsy Mayotte, president of the Institute of Student Loan Advisors, a nonprofit that offers free loan advice and dispute resolution. "It's unfair."