Michael Christofield was thrilled when he found out he was eligible for $10,000 in student loan forgiveness under President Joe Biden’s new plan. Debt relief would help her pay off her loans when her kids go to college.
“I would be able to help them in ways that my parents couldn’t help me,” he said.
But before the app launched, the Biden administration abruptly cut the program. As a result, about 700,000 people on some type of federal loan — including Christofield — lost their eligibility for debt relief.
“He was hanging in front of us,” Christofield, 43, said.
This decision affected borrowers with older federal loans that, through no fault of their own, are held by private lenders instead of the government. The loans are at the center of an ongoing court case, challenging the legality of Biden’s debt relief package.
Biden administration officials have repeatedly said they are evaluating whether there are other avenues to provide relief to such borrowers, but application for the program officially opened on Monday without any updates.
The administration is “acting as quickly as possible to bring relief to as many people as possible,” Education Secretary Miguel Cardona said Monday at a press conference.
However, an appeals court decision on Friday temporarily suspended the program, delaying relief as it considered challenging the loan cancellation plan. The administration had announced that it would begin granting student loan discharges as early as Sunday.
The eligibility change, announced Sept. 29, excluded federal student loans guaranteed by the government but held by private lenders.
Many of these loans were made under the former federal Family Education Loan program, known as FFEL, and the federal Perkins loan program.
Generally, borrowers did not have the option of choosing to take out a federal loan held by the government or a loan held by a private lender. The FFEL program ended in 2010, so borrowers who took out loans after that date likely have direct loans eligible for debt relief. Often, FFEL and Perkins loans are serviced by the same companies as Federal Direct Loans.
The federal government purchased loans from the FFEL program during the Great Recession. But about 4 million of the 43 million federal borrowers currently still have an FFEL loan held by a private lender — although all of those people were likely not initially eligible for the loan forgiveness plan, which also includes an income requirement.
The estimate of the number of these eligible borrowers is based on assumptions about their income as well as the number of people who would apply for the relief. The Biden administration said about 700,000 people lost their eligibility.
Many borrowers with private federal loans feel like they still have the end of the stick. Their loans are also not eligible for the pandemic-related pause on payments and interest that began in March 2020.
Some borrowers with private federal loans may still be eligible for a discount under Biden’s plan. But they must have applied to consolidate their loans into direct federal loans by Sept. 29 — about five weeks after the program was announced.
Paulo Calderon said he immediately considered consolidating his FFEL loans in order to benefit from the debt relief. But when he called his loan manager, it wasn’t clear that consolidation was the best option for him.
“I was actually told there was no guarantee that consolidation would qualify me for loan forgiveness,” said Calderon, 45, who owes about $26,000 in student debt.
There are risks to consolidate. This could have increased his interest rate, thus increasing the amount owed each month. Moreover, the application for debt relief had not yet been launched and the Biden administration said borrowers would have until December 2023 to apply.
Calderon continued his research and was leaning towards consolidation – but did not act until he read a news article on September 29 about the change in eligibility. He called his duty officer back that day, but it was too late to consolidate.
“It was so frustrating. I was like, ‘This can’t happen,’ Calderon said.
The Biden administration changed eligibility criteria on the same day that six GOP-led states sued, saying the president lacked the legal authority to write off student debt.
States have also argued that student loan servicers — including the state of Missouri’s Higher Education Loan Authority, known as MOHELA — are being financially harmed by Biden’s student loan forgiveness plan. The lawsuit pleaded according to the trial.
By excluding these borrowers from the program, the Biden administration likely weakened the plaintiffs’ argument.
On Thursday, the judge dismissed the case, ruling that the states did not have the legal standing to bring the challenge. The states immediately appealed, sending the case back to the 8th Circuit Court of Appeals where it will likely face a panel of conservative judges.
Under Biden’s plan, eligible individual borrowers who earned less than $125,000 in 2020 or 2021 and married couples or heads of households who earned less than $250,000 a year in those years will see up to to $10,000 of their canceled federal student loan debt.
If an eligible borrower also received a Federal Pell Grant while enrolled in college, the individual is eligible for debt forgiveness of up to $20,000.
Direct federal loans, including subsidized loans, unsubsidized loans, parent PLUS loans, and graduate PLUS loans are eligible.
While borrowers with FFEL and Perkins loans who continued to pay their bills on time remain ineligible, defaulted federal loans taken out under any program are eligible.
The pardon application can be found online here.