Lawsuits Threaten Biden’s Debt-Relief Plan

A flurry of lawsuits threaten the Biden administration’s plans to forgive up to $20,000 in federal student loans for eligible Americans.

Four lawsuits seeking to block the student loan forgiveness plan have been filed in the last week, but more are expected. This first group highlights the challenges facing plaintiffs—all make similar arguments as to why the plan is unlawful, but the lawsuits are taking different approaches to prove the plaintiffs have been or will be harmed by debt relief and thus have legal standing to sue.

There’s a borrower who said he would face a tax penalty under the plan. In one suit, six states, including Missouri, are alleging financial harm to state agencies. The Arizona attorney general took a broader approach, arguing in his lawsuit that student debt relief would harm the state’s economy by reducing taxes collected and increasing inflation. Most recently, a group of taxpayers in Wisconsin filed suit, saying the plan would result in higher taxes and a less prosperous country.

A hearing on the lawsuit brought by the six states will be held next week. In the meantime, the Biden administration has agreed not to forgive any student loans before Oct. 17.

Still, the administration has stood by its plans since the lawsuits were filed, and President Biden was defiant over the weekend during a Congressional Black Caucus Foundation event.

“It’s a game changer,” Biden said. “And I don’t want to hear a word from those members of Congress, if you notice, whose families got tens of thousands of dollars and several million dollars in pandemic relief loan forgiveness. The same ones criticizing. Give me a break.”

The Plan

The department announced in August that it would forgive up to $10,000 in federal student loans for Americans earning less than $125,000 or $250,000 for couples filing joint tax returns. Pell Grant recipients would be eligible for an additional $10,000 in debt relief.

But the lawsuits have already led to responses from the U.S. Department of Education, which said last week that commercially held Federal Family Education Loans would not be eligible for debt relief—a move that affected a few million people who had loans before 2010. Borrowers who had those privately held federal student loans and consolidated into the Direct Loan program before last Thursday could still have their loans forgiven, though. Department officials haven’t said publicly whether that decision was in response to one of the three lawsuits, but the change was announced the same day as a lawsuit from six states that focused on privately held federal student loans.

Advocates for debt relief are pushing the administration to extend debt relief to all federal student loans.

Luke Herrine, a law professor at the University of Alabama and an expert on student loans, said those moves seemed to be aimed at undercutting the different standing arguments outlined in the lawsuits.

“Cutting off eligibility for people who have not yet consolidated their loans indicates that the Department of Education takes these lawsuits seriously, knows this is a potentially hostile judiciary and is willing to play some hardball,” Herrine said. “It’s confident in its legal analysis but is willing to make some trade-offs to try to win the case at all costs.”

A federal judge in Indiana has already rejected one argument brought by the Pacific Legal Foundation, representing Frank Garrison, one of its own lawyers, who said he would face a tax penalty if his loans were forgiven. The administration responded in press briefings and in court by clarifying that eligible borrowers could opt out of the debt cancellation.

In ruling late last week, the judge denied Pacific Legal’s motions for temporary and preliminary injunctions, finding that the plaintiff “cannot be irreparably harmed as is required for preliminary relief” because the department exempted him from receiving debt relief. Pacific Legal will be allowed to file an amended complaint.

Next week, a federal judge in Missouri will hear arguments on a motion for a preliminary injunction brought by the attorneys general for the six states involved. The administration’s response is due by the end of this week.

In the Missouri complaint, the attorneys general argued that the plan would harm state agencies that hold Federal Family Education Loans such as the Missouri Higher Education Loan Authority (MOHELA) and states’ coffers, because taxes won’t be collected on discharged loans. In addition to Missouri, the other states involved in the suit are Arkansas, Iowa, Kansas, Nebraska and South Carolina.

In the initial complaint and other filings, the attorneys general say that the department’s debt-relief plan has incentivized borrowers to consolidate commercially held FFEL loans into the Direct Loan program. When a loan is consolidated, the federal government pays it off. The agencies then lose out on interest and serving fees, according to the lawsuit.

MOHELA held $1.1 billion in FFEL loans at the end of fiscal year 2021, with an average interest rate of 6 percent.

“Left alone, those loans will continue to generate millions of dollars per year in interest payments to fund students and educational institutions in Missouri,” the attorneys general wrote in a memo in support of a preliminary injunction. “But the consolidation of FFELP loans into DLP loans prompted by the Mass Debt Cancellation eliminates much of that revenue. That loss of existing income streams ‘reduc[es] the return on [MOHELA’s] investments’ and thereby inflicts an ‘actual financial injury.’”

MOHELA is not a named party in the lawsuit.

Herrine said the Missouri lawsuit seems to pose the greatest threat to the debt-relief plan, because that lawsuit has a more typical standing argument.

“It’s purely a political battle,” Herrine said. “The main lead attorney in this lawsuit [Missouri attorney general Eric Schmitt] is running for Senate, and he apparently thinks this is going to be good for him. It’s not clear to me that this is anything but a political stunt.”

The Arizona Suit

At the end of last week, Arizona attorney general Mark Brnovich filed the third lawsuit to challenge the debt-relief plan. He argued in the initial complaint that the plan would hamper the Attorney General’s Office’s ability to hire, because it relies on the Public Service Loan Forgiveness program to recruit employees, and the plan would make working at the attorney general’s office less lucrative and make the forgiveness program less attractive. Additionally, forgiving debt would harm the state’s treasury, increase the cost of borrowing and add to the state’s law enforcement costs because of the expected increase in fraud related to student debt.

Jack Fitzhenry, a senior legal policy analyst at the Heritage Foundation, a conservative think tank, said the Arizona lawsuit’s standing argument is based on macroeconomic ramifications of loan forgiveness.

“It’s taking aim at the more attenuated financial and economic effects of forgiving over $400 billion in student loans,” he said.

Fitzhenry said the standing theories proffered so far are creative, and he expects to see more as legal groups and individual borrowers look into the implications of taxing the discharged debt. Seven states currently are taxing forgiven student loans.

He’s curious to see how the courts respond to the standing theories as well the arguments against student loan forgiveness.

Several of the lawsuits’ arguments focus on the Higher Education Relief Opportunities for Students, or HEROES, Act of 2003, which the administration cited as the legal justification for the one-time debt relief. The law was passed after the Sept. 11 attacks and authorizes the education secretary to forgive student loans during specific periods such as a war or national emergency.

The U.S. Department of Education’s general counsel wrote in a legal memo that the act allowed for a targeted loan cancellation program “directed at addressing the financial harms of the COVID-19 pandemic.”

The various plaintiffs disagree.

“It is inconceivable, when it passed the HEROES Act, that Congress thought it was authorizing anything like the administration’s across-the-board debt cancellation, which will result in around half a trillion dollars or more in losses to the federal treasury,” the attorneys general wrote in the Missouri lawsuit.

The lawsuits also argue that the debt-relief plan violates the separation of powers clause in the Constitution, because only Congress can appropriate funds for spending.

“This is—by an order of magnitude or more—the most expensive unilateral executive action ever attempted by any President,” the Arizona attorney general wrote in his initial complaint. “It circumvents Congress’s constitutional power of the purse in a manner no other president has ever attempted. It further inflicts greater harm on the fiscal solvency of the United States than any other presidential action ever.”

On Tuesday, the Wisconsin Institute for Law & Liberty, representing the Brown County Taxpayers Association in Wisconsin, also filed a lawsuit to block the debt-relief plan. The initial complaint argues that student loan forgiveness would negatively affect taxpayers and that the plan is “unconstitutional race discrimination” because Biden and other officials have said it would disproportionately benefit Black borrowers.

Undermining Debt Relief?

Caught in the middle of the lawsuits are the roughly 40 million people expected to benefit from loan forgiveness. The department has said it would launch the application for debt relief this month. That application will be short and not require supporting documents.

“I do think the fact that it took this long for the department to get things going was a major problem for the rollout,” Herrine said. “If they had started the application process last month, a lot of these claims would be moot, and it would be much harder to wage this legal battle.”

Groups that work with borrowers are trying to get answers about whether borrowers with commercially held FFEL loans should consolidate, what those who already consolidated should do and how these moves will affect those applying for the Public Service Loan Forgiveness waiver, which ends Oct. 31, among other questions.

“The thing I’m most concerned about is this sowing more confusion and making borrowers anxious about their relief that they’re entitled to,” said Natalia Abrams, president and founder of the Student Debt Crisis Center, which has advocated for student loan forgiveness.

Abrams said the center has been inundated with calls since the Sept. 29 announcement about FFEL loans as borrowers try to figure what it means for them. She said the borrowers need answers soon from the Education Department, particularly about consolidation and the PSLF waiver.

The lawsuits challenging the plan were inevitable, she said, but she’s more focused on the department’s implementation of one-time loan forgiveness.

“It’s important for borrowers to note that, even in a worst-case scenario, if a lawsuit moves forward, that doesn’t mean that they’re going to win,” she said. “Even if it’s a worst-case scenario and they do win a lawsuit, that doesn’t necessarily mean it will overturn the entire program for everyone. There are other remedies in lawsuits than just undoing the entire program.”

Kristin McGuire, executive director of Young Invincibles, an advocacy group focused on amplifying the voices of young adults, said the lawsuits are an “insensitive attempt” to undermine the debt-relief plan.

“I don’t think there’s anything that the administration could have done that would have prevented these attacks,” McGuire said. “Of course, as an advocate, we would have liked to see more cancellation or maybe having [the PSLF waiver] extended to match the deadlines with the debt-cancellation rollout. But at the end of the day, the opponents of debt cancellation would have opposed any decision that was made.”

Young Invincibles is hosting webinars about the PSLF waiver and planning a public campaign to promote the debt-relief application once it’s released. The organization is also pushing the department to make the application as accessible as possible, such as by providing a paper application or translating it in multiple languages.

McGuire said she wants to reach as many people as possible before student loan payments resume in January.

“It’s important that we get the right information out to people,” she said. “There’s a lot of intentional misinformation going around, and what it does is keep certain groups of people from participating in the program. I think a lot of these lawsuits are also attempts to provide misinformation to people and to make them afraid to apply for the debt cancellation.”

Even with the elimination of the commercially held FFEL and Perkins borrowers, McGuire said the plan works well for eligible Americans. She urged advocates and borrowers to stay vigilant in the face of the lawsuits.

“At the end of the day, folks who participate in the higher education system benefit our country, and we should all be willing to help folks access higher education,” McGuire said.