By Nandita Bose and Paul Grant
WASHINGTON (Reuters) -The Biden administration changed its guidance on who qualifies for federal student loan forgiveness on Thursday, as seven Republican-led states filed a challenge to its student debt cancellation program.
President Joe Biden said in August that the U.S. government will forgive $10,000 in student loans for millions of debt-saddled former college students, keeping a pledge he made in the 2020 campaign for the White House.
The decision from the U.S. Department of Education (ED) on Thursday affects Federal Family Education loan (FFEL) borrowers - whose loans were issued and managed by private banks but guaranteed by the federal government - and does not allow them to consolidate their loans and qualify for debt relief.
Earlier, the department's website advised these borrowers that they could consolidate these loans into federal direct loans and qualify for relief.
On Thursday, the department changed the language to: "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."
According to federal data, more than 4 million borrowers still have commercially held FFEL loans. An administration official, who declined to be identified, said the change impacts 770,000 borrowers.
It was not immediately clear what led to the decision. A spokesman for the Education Department said "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."
Betsy Mayotte, president of the Institute of Student Loan Advisors, said the updated guidance is "a gut punch, to say the least."
Earlier on Thursday, in a lawsuit the states of Nebraska, Arkansas, Iowa, Kansas, Missouri and South Carolina asked the court for an immediate temporary restraining order pausing the student debt relief program. The state of Arizona filed a separate lawsuit on Thursday evening.
White House spokesman Abdullah Hasan said the Biden administration is offering families "breathing room" while Republican officials from these six states "are standing with special interests."
The lawsuit argued that when FFEL borrowers consolidate their old loans into federal direct loans, private banks essentially lose business.
The lawsuit comes two days after conservative group Pacific Legal Foundation filed a federal lawsuit with the intent of stopping Biden's student loan cancellation plan, which was dismissed on Thursday.
On Monday, the Congressional Budget Office (CBO) said Biden's plan to cancel some student loan debt will cost $400 billion.
Critics of the plan raised concerns over its inflationary impact, while the White House said it was fiscally justified because the federal deficit was on track to shrink by $1.7 trillion in the current fiscal year compared with the prior year. The smaller deficit is largely due to the end of many COVID-19 aid programs and unexpectedly higher revenue.
As of June 30, 43 million borrowers held $1.6 trillion in federal student loans. About $430 billion of that debt will be canceled, the CBO estimated. The CBO previously projected that some of the funds canceled by Biden's action would eventually have been forgiven anyway.