Marty Correia thought she was closer to ridding herself of student debt when in 2022 she learned about President Biden waiving the rules of a loan forgiveness program for public service workers.

The administration said that if Correia and others with federal loans held by private companies consolidated into the government’s direct loan portfolio, they could get credit for past payments that didn’t normally qualify for the forgiveness program.

But Correia’s excitement faded after her loan servicer said the decades-old debt was actually ineligible.

After months of digging, Correia, 54, found out that a private lender had mishandled her loan some 20 years ago, leading the Education Department to permanently revoke its insurance on the debt. By penalizing the lender, the federal government also penalized Correia. Even though she had faithfully made payments and worked for a nonprofit since 2006 – key criteria of the Public Service Loan Forgiveness program – Correia would just have to keep paying.

“Why do I have to suffer for someone else’s mistake?” said Correia, an administrative aide at New York University. “The waiver seemed like a dream come true and to have it snatched away for something I didn’t even do is just wrong.”

A little-known provision of a defunct federal lending program is shutting out student loan borrowers like Correia from Biden’s debt relief programs. Although the policy has long existed, many borrowers only discover it when they try to consolidate their debt into a new federal loan to become eligible for forgiveness. By then, it is often too late for recourse.

The policy is a feature of the Federal Family Education Loan (FFEL) program, in which the lenders used their money to finance student loans while the government paid a portion of the interest and insured the loan against default. To keep that insurance, lenders had to meet a host of requirements when a borrower fell behind, such as calling or writing a set number of times.

If the loan lost the government guarantee, lenders could reclaim it within three years by getting a borrower to pay or sign a repayment agreement. Short of that, the loan would become permanently uninsured. The Education Department said it also permanently stripped loans of insurance because lenders or the companies servicing the debt falsified records or submitted false claims to the government.

Once a FFEL loan is deemed permanently uninsured, the department no longer considers it to be federal and therefore bars the debt from being consolidated into the direct loan program.

The Education Department recently said it is looking into the matter. A reversal would be a win for a group of debtors who have been excluded from so many generous government benefits just because of who holds their loans.

Although FFEL ended in 2010, there are still 8 million people with debt from the program. Half of them have FFEL loans held by private entities. The Education Department says it is difficult to pin down how many of those borrowers have permanently uninsured loans because there are no reporting requirements after the debt loses insurance.

The Education Department has long been at odds with companies that hold FFEL debt over the handling of uninsured loans. Industry groups have pressed the federal agency to revise its consolidation policy, but emails obtained by The Washington Post show resistance from some in the office of the general counsel. Department officials have argued that allowing consolidation – whereby the government would purchase the FFEL loan from the company holding the debt – would undermine any punishment to lenders for mishandling loans.

But the impasse has left borrowers in the lurch. The National Council of Higher Education Resources estimates that in 2021, more than 20,000 borrowers held permanently uninsured debt. The trade group has said that figure is an understatement as large lenders were not included.

After dropping out of the University of Massachusetts at Amherst in 1991, Correia struggled to make payments on the $10,000 she borrowed for a degree in public health and a paralegal program. By 2002, she was more financially secure and consolidated her four loans – with interest rates ranging from 6.7 to 10 percent. The debt had grown to $18,500, but the $175 monthly payments were manageable, she said.

A few years into her administrative job at NYU, Correia decided to take advantage of the university’s tuition remission for employees and earned a bachelor’s degree in 2012. Two years later, she completed a Master of Fine Arts in creative writing at the university. Even though NYU covered the cost of both programs, Correia had to pay taxes on the benefit and took out another $33,000 in student loans to cover the obligation.

In 2021, the Biden administration announced that it would ease some rules for public servants to qualify for forgiveness after years of bureaucracy and poor guidance barred many from receiving relief. Among the changes: allowing people who consolidated their privately held federal loans to have all of their payments count, not just those made after consolidation.

By the time Correia learned about the waiver, she was two years shy of earning tax-free loan forgiveness on the loans for NYU and hoped to add her decades-old undergraduate debt to the mix for possible cancellation. However, her consolidation request was rejected. Correia pressed her loan servicer, Navient, for answers. In an email, the company told her that the loan was transferred to Navient in 2005 from her lender without a federal guarantee – making it ineligible for consolidation and ultimately PSLF relief.

“At first, I felt defeated but the more I thought about the situation I just got angry,” said Correia, who is paying nearly $600 a month on her two loans. “I’m 54 and working three jobs. It’s not like I have an expensive lifestyle. I want to help my niece and nephew. I’m not alone in this.”

Frustrated, Correia shared her story in a letter that activist group the Debt Collective sent to the White House. Several months later, she received an email from the Education Department that offered little more than confirmation that Correia’s FFEL loan was ineligible for consolidation “due to mishandling … by the commercial loan holder.” But it included no path forward.

Behind the scenes, career staff at the Education Department have long deliberated whether the agency could help people like Correia. As far back as 1999, the department had explored the legal rights of students with uninsured loans but stood firm on its consolidation policy, according to internal emails. The issue was again raised in 2016 by the National Council of Higher Education Resources, which represents private lenders, loan servicers, debt collectors, and loan guarantee agencies.

The trade group asked the department to provide the same benefits to all FFEL borrowers and allow those with uninsured loans the opportunity to consolidate. The council – which declined to comment to The Post – continued to press the matter for another two years. But internal emails show that a senior attorney at the federal agency refused to relent and argued in 2018 that “lenders who failed to comply with the department’s regulations or committed fraud could effectively avoid the impact of those improper actions by getting the borrower to consolidate into [a direct loan].”

Emails show that discussions about revising the policy came up again within the Education Department last summer, but no resolution was reached. In the meantime, as new loan forgiveness initiatives are introduced, more people are discovering that they are trapped in an uninsured loan.

Consumer Financial Protection Bureau spokesperson Tia Elbaum said the agency has heard complaints from borrowers “who are confused and frustrated about why they are unable to access benefits like PSLF or income-driven repayment, often through no fault of their own.”

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