Biden's Education Department just decided 5 million student-loan borrowers with privately held debt aren't eligible for relief

Some borrowers with privately held loans have been in relief limbo. But the Education Department now says they're not eligible.

• Student loan relief is rolling out soon for borrowers, as guidance on cancelation comes in.
• The Education Department has decided that privately held Federal Family Education Loans are ineligible for relief.
• About 5 million borrowers have their FFEL loans privately held, and the lenders could sue over relief.

Borrowers who have been waiting with bated breath since President Joe Biden's student debt cancelation announcement are finally getting some clarity on relief — and some might learn they're ineligible.

On Thursday, the Department of Education sent out its first guidance to borrowers on how relief will work. The department also clarified that some borrowers with privately-held loans will not be able to share in Biden's relief, which will cancel $10,000 to $20,000 in debt for some borrowers earning under $125,000.

"As of Sept. 29, 2022, borrowers with federal student loans not held by ED cannot obtain one-time debt relief by consolidating those loans into Direct Loans," the Federal Student Aid's website now reads. 

That refers in part to Federal Family Education Loan (FFEL) program loans, which have so far rested in a murky area when it comes to eligibility. Those loans, which are privately-held, are guaranteed by the Department of Education; after the program shuttered in 2010, the Education Department bought some — but not all — FFEL loans. That's left 5 million borrowers with privately-held FFEL loans in a state of relief limbo, as the Department had said it was "assessing" whether to extend eligibility to those borrowers.

Ultimately, borrowers in the program who applied to consolidate their loans and merge them into one through the Direct Loan program will be eligible if they applied for consolidation prior to September 29.

"Our goal is to provide relief to as many eligible borrowers as quickly and easily as possible, and this will allow us to achieve that goal while we continue to explore additional legally-available options to provide relief to borrowers with privately owned FFEL loans and Perkins loans, including whether FFEL borrowers could receive one-time debt relief without needing to consolidate," an Education Department spokesperson said.

As Politico's Michael Stratford reports, the network of lenders, servicers, and investors behind those privately-held loans might represent a serious legal challenge to relief — and officials at the Education Department have been attempting to negotiate a deal with those groups to offset the costs of relief and avert potential lawsuits, per Politico.

"ED is assessing whether there are alternative pathways to provide relief to borrowers with federal student loans not held by ED, including FFEL Program loans and Perkins Loans, and is discussing this with private lenders," the website says.

The desire to skirt a lawsuit comes as two other major suits hit the Biden administration and Department of Education. One, which may have been sidestepped by the announcement that borrowers can opt out of relief, hinges upon a borrower who argues that his unwanted automatic relief will incur a hefty tax bill from his home state of  Indiana.

The other suit, field by six Republican states, claims that several of them will miss out on tax revenue from the loan discharge. The suit also argues that relief wrongly hinges upon the pandemic's ongoing impact on borrowers and the economy, even though President Biden has since declared the pandemic over.