Defense Secretary Ash Carter ordered the Pentagon on Wednesday to stop clawing-back the bonuses that thousands of soldiers got for reenlisting to serve in Iraq and Afghanistan.
"There is no more important responsibility for the Department of Defense than keeping faith with our people," Carter said in a statement. "Today, in keeping with that obligation, I am ordering a series of steps to ensure fair treatment for thousands of California National Guard soldiers who may have received incentive bonuses and tuition assistance improperly as a result of errors and in some cases criminal behavior by members of the California National Guard."
White House spokesman Josh Earnest told reporters on Wednesday that the message to struggling soldiers is President Obama "has their back."
"The President makes the fair treatment of our service members a top priority," Earnest said. "When a promise is made to our men and women in uniform, we should keep. That's certainly the view of the President."
Carter's announcement was greeted with cheers in Kempner, Texas where Don and Susan Haley — both Iraq War veterans — had been struggling to pay back the bonuses they got when they reenlisted a decade ago in the California National Guard.
"This is awesome," Don Haley, 47, told NBC News. "I wish this happened a week ago. My wife just cut a check for $650 to cover this month's payment."
Rep. Adam Schiff, a California Democrat who had been urging the Pentagon to act, also applauded Carter's move.
"Secretary Carter made the right call to suspend efforts to collect bonuses and benefits that were given in error to soldiers who enlisted or reenlisted to serve our nation during war time," he said in a statement. "While this will help some families sleep a bit easier at night, much more needs to be done, starting with Congressional legislation to waive these debts and to provide relief to soldiers who have already repaid some or all of the bonuses they accepted in good faith."
House Speaker Paul Ryan said he was glad "the Pentagon came to its senses."
The Los Angeles Times broke the story over the weekend, stoking nationwide outrage.
The good news for the Haleys, whose son lost a leg while fighting in Afghanistan, came after Carter — in an exclusive interview with NBC News — blasted the treatment of thousands of soldiers who were being forced to return the bonuses they got for signing up for six more years.
"Well, of course I am outraged," Carter said. "This is a case where we have a trust with the service members who have served us and ... we need do justice. And we need to do it fast."
Soldiers who refused to pay the bonuses back faced possible interest charges, wage garnishments and tax liens.
The Pentagon's demand that they return the cash angered Washington lawmakers, who in a bipartisan show of support ordered the California National Guard to turn over documents and audits concerning the program by Nov. 7.
The chairman of the House Oversight Committee, Rep. Jason Chaffetz, R-Utah, also called for the officials who mismanaged the program to be "held accountable."
Other lawmakers, including House Democratic Leader Nancy Pelosi of California, vowed to pass legislation to halt the recovery of the bonuses as soon as Congress is back in session after the Nov. 8 election.
Carter said he does not yet know how far-reaching the problem has been although the Department of Defense has acknowledged it could extend beyond California. He said he would like to fix the problem without waiting for Congress.
"We are going to do everything we possibly can without waiting for any change in the law [although] there are some legal limitations," he said. "We need to do the right thing by our service members — that's the main thing. We also have to do the right thing by the taxpayer. And of course we will."
U.S. Army Major Jamie Davis, a Defense Department spokesman, said they are reviewing other cases where vets were ordered to pay back reenlistment bonuses.
"As it looks right now, this is an isolated incident in California and not a nationwide issue," Davis said. "There may be some others out there, but nothing to this extent."
The roots of the scandal go back a decade to when the Bush administration, which was struggling to find soldiers willing for fight in Iraq and Afghanistan, began encouraging state National Guard units to offer sign-up bonuses. Some 9,700 California National Guard soldiers got the bonuses in 2006 and 2007.
Then in 2010, federal investigators discovered that thousands of those bonuses, as well as student loan payments, were improperly approved. The next year, Army Master Sgt. Toni Jaffe, the California National Guard's bonus and incentive manager, pleaded guilty to filing $15.2 million in false claims and was sentenced to 30 months in federal prison.
But instead of moving to forgive the botched bonuses, the California National Guard sent its auditors to collect from the soldiers arguing that the law did not allow them to do otherwise. They concluded that a majority of those soldiers, about 6,500, needed to repay the bonuses because they were not actually eligible for them or the paperwork at the time had errors.
Meanwhile, California lawmakers began hearing from hard-pressed soldiers.
And in February 2014, Rep. Jeff Denham, a Republican representing Modesto, California drafted an amendment aimed at helping the soldiers.
That measure never made it out of the GOP-led House Committee on Armed Services.
The reason, sources told NBC News, was two-fold: the California National Guard did not make the issue a top priority and the committee members did not realize the scope of the problem and believed the Pentagon's appeals process would take care of the handful of cases they each were seeing.
The California Military Department sent a letter in 2014 to Congress requesting money for "Servicemember Debt Relief Equity." But it was issue number six out of six.
And in a March 17, 2014 appropriations request obtained by NBC News, California military officials asked for money for Blackhawk helicopters, radar units and educational programs, but not a dime for the struggling soldiers.