Who are the 700,000 debtors excluded from the Biden forgiveness plan

() — 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 him not be paying off his student loans by the time his children go to college.

“I would be in a position to help them in a way that my parents couldn’t help me,” he said.

But before the application form was released, the Biden administration abruptly scaled back the program. As a result, approximately 700,000 people with certain types of federal loans, including Christofield, lost eligibility for debt forgiveness.

“They took it out of our hands,” said Christofield, 43.

The move affected older federal loan borrowers who, through no fault of their own, rely on private lenders rather than the government. The loans are at the center of a lawsuit making its way through the courts, challenging the legality of Biden’s debt relief program.

Officials in the Biden administration have repeatedly said they are evaluating whether there are alternative ways to forgive those borrowers’ debts as well, but the application form for the program officially began Monday with no update.

The government is “working as quickly as possible to provide relief to as many people as possible,” Education Secretary Miguel Cardona said at a news conference on Monday.

However, an appeals court ruling on Friday temporarily halted the program, delaying debt forgiveness while the plan is evaluated. The government had said it would begin granting student loan forgiveness starting Sunday.

Who will be left out?

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.

In general, borrowers did not have a choice between applying for a federal loan from the government or one from a private lender. The FFEL program ended in 2010, so borrowers who took out loans after that date likely have direct loans that do qualify for debt relief. Generally, FFEL and Perkins loans are serviced by the same companies that service Federal Direct loans.

The federal government purchased some FFEL program loans during the Great Recession. But about 4 million of the 43 million federal loan borrowers currently still have a FFEL loan with a private lender. Initially, not all of those people were eligible for the loan forgiveness plan, because it also includes an income requirement.

The estimate of how many of those borrowers were eligible is based on assumptions about their income and how many people would apply for relief. The Biden administration said about 700,000 people lost eligibility.

Many borrowers with federal private loans feel they are being shortchanged. Their loans also did not qualify for the pandemic-related payment and interest pause that began in March 2020.

Borrower frustration: “This can’t be happening”

Some borrowers with private federal loans may still qualify for forgiveness under Biden’s plan. But for that, they must have applied to consolidate their loans into Federal Direct Loans by September 29, about five weeks after the program was announced.

Paulo Calderón said he immediately considered consolidating his FFEL loans to qualify for debt relief. But when he called his loan servicer, it wasn’t clear if consolidation was the best option for him.

“In fact, they told me there was no guarantee that consolidation would qualify me for loan forgiveness,” said Calderón, 45, who has about $26,000 in student debt.

It is true that there are risks in consolidation. It could increase the interest rate, raising the amount owed from month to month. In addition, the debt relief application had not yet been launched, and the Biden administration said that borrowers would have until December 2023 to apply.

Activists hold student debt cancellation signs as they gather to demonstrate outside the White House in Washington, on Aug. 25, 2022. (Photo: STEFANI REYNOLDS/AFP via Getty Images)

Calderón continued to investigate and although he was leaning toward consolidation, he did not make his decision before reading a September 29 newspaper article that discussed the change in eligibility criteria. He called the manager back for him that day, but it was too late to consolidate.

“It was so frustrating. I was like, ‘This can’t be happening to me,'” Calderon said.

Why are some loans treated differently?

The Biden administration changed the eligibility criteria the same day that six GOP-led states filed a lawsuit, alleging the president lacks the legal authority to forgive student debt.

The states also argued that student loan servicers, including the Missouri State Higher Education Loan Authority, known as MOHELA, are financially harmed by Biden’s student loan forgiveness plan. The lawsuit argued that the plan creates an incentive for borrowers to consolidate MOHELA-owned Federal Family Education Loans into government-owned Direct Loans, “depriving them (MOHELA) of the ongoing income it earns from servicing those loans.”

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 file a challenge. The states immediately appealed, sending the case to the 8th Circuit Court of Appeals, where it is likely to go to a panel of conservative judges.

Who still qualifies for debt forgiveness?

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 annually in those years will receive up to $10,000 of their debt forgiven. federal student loan debt.

If a qualified borrower also received a Federal Pell Grant while enrolled in college, that person will be eligible for up to $20,000 of debt forgiveness.

Federal Direct Loans, including Subsidized Loans, Unsubsidized Loans, Parent PLUS Loans, and Graduate PLUS Loans, are also eligible.

While FFEL and Perkins borrowers who have continued to pay their bills on time remain ineligible, delinquent federal loans taken out under either program are eligible.