It's about the polymorphism of iron - gamma iron which is paramagnetic dissolves about 2% of carbon while alpha iron ( highly magnetic ) dissolves a maximum of 0.025 % of carbon.
The reason for the different solubility is the different crystal structure. The alpha Fe is a body-centered cubic (BCC) and the gamma Fe is a face-centered cubic (FCC).
In FCC, the octahedral holes are larger than the tetrahedral holes and therefore the carbon atoms are located in these symmetrical octahedral holes. The interstitial holes in BCC Fe are much smaller, which explains the very limited solubility of carbon in it. On the other hand, carbon in Fe induces deformation of the crystal lattice and thus deteriorates the soft magnetic properties of iron (coercivity increas).
Alpha iron (α-Fe) is an allotrope of iron with a body-centered cubic (BCC) crystalline structure. It is thermodynamically stable and a fairly soft metal. It is a ferromagnetic material that generates magnetic properties due to its crystalline nature. It is structurally stable below 910°C (1,670°F) and highly irregular after this upper temperature boundary. First, let's talk about FCC and BCC structure. The octahedral voids are usually larger than the tetrahedral holes in FCC, so more carbon atoms are found in these symmetric octahedral voids at a particular temperature. The interstitial pores in butt BCC Fe are very small, which should have very low solubility of carbon. On the other hand, carbon in Fe induces distortion of the crystal lattice, thereby reducing the magnetization of the iron and hence increasing the coercivity.