The announcement is a significant victory for opponents of the Obama administration's guidelines who believe the federal government never should have gotten involved in the issue.
Civil rights groups, meanwhile, denounced the withdrawal as a politically motivated attack that will endanger transgender children and sow confusion over the federal government's role in enforcing civil rights.
The announcement follows the Department of Justice's recent withdrawal from a court challenge
related to the guidance. Observers said it portended more anti-LGBTQ sentiment from the administration, despite promises from President Trump and Education Secretary Betsy DeVos to protect the LGBT community.
"This is a mean-spirited attack on hundreds of thousands of students who simply want to be their true selves and be treated with dignity while attending school," Mara Keisling, executive director of the National Center for Transgender Equality, said in a statement.
How we got here
The Obama administration said the guidance was based on best practices from schools across the country that have already taken up the issue. Though many states have laws consistent with the guidance, lawmakers and educators called the directive federal overreach that threatened safety and privacy of non-transgender students.
Texas Attorney General Ken Paxton sued on behalf of several states and won a nationwide injunction barring federal agencies from taking action against the schools that resisted the guidance. The Justice Department under the Obama administration challenged the lawsuit and arguments were scheduled for early February. Then, one day after former Alabama Sen. Jeff Sessions was sworn in as attorney general, the Justice Department withdrew its challenge so the parties could decide "how to best proceed."
Paxton welcomed the withdrawal and said his office was evaluating how it would impact the litigation.
"Our fight over the bathroom directive has always been about former President Obama's attempt to bypass Congress and rewrite the laws to fit his political agenda for radical social change. The Obama administration's directive on bathrooms unlawfully invaded areas that are left to state discretion under the Tenth Amendment. School policy should center on the safety, privacy and dignity of its students, not the whims federal bureaucrats."
Why the guidance was rescinded
In the two-page letter to public schools, the Trump administration said the Obama-era guidance did not provide "extensive legal analysis" of how its position was consistent with Title IX.
The letter cited "significant litigation" caused by the guidance, showing the need for "due regard" of the role of states and local school districts in shaping education policy.
"As President Trump has clearly stated, he believes policy regarding transgender bathrooms should be decided at the state level," the White House said in a statement.
"The joint decision made today by the Department of Justice and the Department of Education returning power to the states paves the way for an open and inclusive process to take place at the local level with input from parents, students, teachers and administrators."
However, sources told CNN Wednesday
that DeVos originally opposed a draft of the Trump administration's plan for withdrawing the guidance.
'Not what Betsy wanted to do'
When the new guidance was issued Wednesday night, DeVos was publicly on board. Behind the scenes, however, "This is not what Betsy wanted to do," one source outside of government who said he's familiar with DeVos' thinking on the plans told CNN.
She communicated her feelings to Sessions, the source said. Then, she was summoned to the White House on Tuesday for a meeting with him and President Trump, where she was told to agree to the plans.
"It was the President's decision," the source said. "When the President tells you to do something you don't want to do, that is a hard spot to be in."
DeVos reminded Trump that both of them had publicly promised to protect all students, and she felt that withdrawing the guidance ran counter to those promises. She was concerned that some people may interpret the action as removing protections.
She requested additional language in the letter affirming that students would still be protected and the Department of Education's Office of Civil Rights would investigate issues.
Ultimately, the letter states that withdrawal of the guidance "does not leave students without protections from discrimination, bullying, or harassment."
On Wednesday, DeVos reaffirmed the administration's responsibility "to protect every student in America and ensure that they have the freedom to learn and thrive in a safe and trusted environment.
"This is not merely a federal mandate, but a moral obligation no individual, school, district or state can abdicate," she said in a statement. "At my direction, the department's Office for Civil Rights remains committed to investigating all claims of discrimination, bullying and harassment against those who are most vulnerable in our schools."
Supreme Court poised to consider related case
Civil rights groups were quick to point out that the announcement does not undo Title IX or state-level protections for transgender students.
"Trump's actions do not change the law itself -- transgender students remain protected by Title IX of the Education Amendments of 1972 -- but abandoning the guidance intentionally creates confusion about what federal law requires," Rachel B. Tiven, CEO of Lambda Legal, said in a statement.
"The law bars discrimination -- the new administration invites it."
It remains to be seen how it will impact courts' interpretations of anti-discrimination law in pending cases, including the first Supreme Court test of Title IX as it relates to transgender students.
The court is poised to consider the case of Gavin Grimm, a 17-year-old transgender student from Virginia who wants to use the bathroom that corresponds to his gender identity.
Last April, a federal appeals court ruled in favor of Grimm, who fought a school board policy that denied him access to the boys' bathroom but allowed him the use of recently constructed single-stall unisex restrooms.
In ruling for Grimm and against the school district, the court deferred to the Obama administration's interpretation of Title IX.
The Gloucester County School Board welcomed the Trump administration's withdrawal of the letter at issue in its case.
"This action shows 'due regard for the primary role of the States and local school districts in establishing educational policy.' We look forward to explaining to the Supreme Court why this development underscores that the Board's commonsense restroom and locker room policy is legal under federal law," a lawyer for the school board said Wednesday.
Arguments in the case are scheduled for March 28. While the Trump administration's new guidance may not stop the case, it could give the justices an off-ramp to send the matter back to the lower court to consider the new guidance. The court could also decide to send the case back before arguments.
"While it's disappointing to see the Trump administration revoke the guidance, the administration cannot change what Title IX means," said ACLU Senior Staff Attorney Joshua Block, lead counsel for Grimm.
"When it decided to hear Gavin Grimm's case, the Supreme Court said it would decide which interpretation of Title IX is correct, without taking any administration's guidance into consideration. We're confident that that the law is on Gavin's side and he will prevail just as he did in the Fourth Circuit."