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The Legal Challenges to Student Debt Forgiveness
The battle over legal standing is just beginning.
When the Biden Administration announced its student debt forgiveness plan in late August, it also released a short legal memo explaining why it believed the Department of Education has the authority to unilaterally discharge student debt in this manner. From the memo:
The HEROES Act authorizes the Secretary to “waive or modify any statutory or regulatory provision applicable to the student financial assistance programs” if the Secretary “deems” such waivers or modifications “necessary to ensure” at least one of several enumerated purposes, including that borrowers are “not placed in a worse position financially” because of a national emergency.
In this case, the national emergency is the COVID-19 pandemic and the modification is the student debt forgiveness plan announced by Biden.
Shortly after the memo was released, a number of legal scholars, most prominently Jed Shugerman, argued that this rationale would probably not survive a court challenge:
The Roberts Court has effectively abandoned Chevron deference to the executive branch in questions of “vast economic and political significance.” This new approach, known as “the major-questions doctrine,” does not turn on “textualism”—reading just the words of the statute on their own—but instead emphasizes the context, purposes, and legislative history of the statute.
The Roberts Court relied on this “major-questions doctrine” approach to strike down two of the Biden administration’s boldest COVID-emergency policies—the eviction moratorium and the vaccine-or-testing mandate at certain places of employment—and a significant Obama-era climate-change policy in West Virginia v. EPA.
To actually get the legal question in front of a court, a plaintiff must be found that has standing to challenge the policy. But finding a person, business, or government that will suffer a concrete and particularized injury as a result of the student debt forgiveness and that is willing to be a plaintiff in a lawsuit over it is not easy to do.
So far, four lawsuits have been filed challenging the student debt forgiveness policy, each with a slightly different approach to establishing standing.
1. State Income Tax Liability
The Pacific Legal Foundation filed a lawsuit on behalf of Frank Garrison, a student debtor enrolled in the Public Service Loan Forgiveness (PSLF) program.
Prior to the student loan forgiveness, Garrison was on track to make 4 more years of income-based repayments and then have his debt forgiven. The forgiven debt would not have incurred any federal or state income tax liability. But with the student loan forgiveness, Garrison’s debt would be immediately forgiven and this would cause him to have state income tax liability under Indiana’s tax laws. This tax liability is the injury that gives him standing to sue, according to Garrison’s complaint.
In response to the lawsuit, the Department of Education modified its student loan forgiveness plan so as to allow individual student debtors to opt out of forgiveness. In light of this policy change, the judge in Garrison’s case concluded that, because the plaintiff could opt out, he could avoid the state tax liability injury and ruled against him.
2. State Employer Recruitment
The Arizona Attorney General, Mark Brnovich, filed a lawsuit that alleges that the Biden student debt forgiveness creates a variety of injuries to the Arizona AG and to the State of Arizona more generally. These include:
The ability of state employers, like the Arizona AG’s office, to use the Public Service Loan Forgiveness (PSLF) program as an employee recruiting tool will be diminished by the blanket debt forgiveness in the Biden plan.
The debt forgiveness will shift student debt forgiveness that is slated to occur after 2026 (e.g. as part of the income-driven repayment (IDR) program) into 2022 and 2023. Under current law, student debt forgiven prior to 2026 is not subject to the Arizona state income tax, but student debt forgiven after 2026 is. Thus, pulling student debt forgiveness forward reduces state tax collections.
A variety of speculative macroeconomic effects like higher inflation, lower employment, and higher costs of borrowing will hurt the State of Arizona.
No further action has occurred in this case.
3. States that Own FFELP Loans
The Attorneys General of Arkansas, Iowa, Kansas, Missouri, Nebraska, and South Carolina filed a lawsuit alleging that the Biden student debt forgiveness causes various injuries. They are as follows:
The Higher Education Loan Authority of the State of Missouri (MOHELA), the Arkansas Student Loan Authority (ASLA), and the Nebraska Investment Council (NIC) own student debt incurred as part of the Federal Family Education Loan Program (FFELP). MOHELA and ASLA own FFELP debt directly and service it. NIC owns FFELP debt through its investments in student loan asset-backed securities (SLABS). In Biden’s initial student debt forgiveness plan, FFELP loans were not eligible for forgiveness. But FFELP debtors could consolidate their FFELP loans into loans administered by the Direct Loan Program (DLP) and then those balances would be eligible for forgiveness. The states argue that this pathway to forgiveness would injure MOHELA, ASLA, and NIC by reducing their revenues.
In addition to its FFELP portfolio, MOHELA services $59 billion of DLP loans. Complying with the Biden student debt forgiveness plan would require MOHELA to undergo significant costs.
Like Arizona above, many of these states will see a reduction in state income tax revenues because, under current law, student debt forgiveness is not subject to state income tax in Nebraska, Iowa, Kansas, and South Carolina if it is done prior to 2026. But it is subject to state income tax if it is done after 2026. Pulling IDR-related student debt forgiveness that is currently slated to occur after 2026 forward to 2022 or 2023 thus reduces state income tax revenue.
In response to this lawsuit, the Department of Education announced a change to the student debt forgiveness plan. Contrary to the initial plan, FFELP debtors would not be allowed to refinance into DLP loans and thereby become eligible for forgiveness. This change was clearly aimed at undermining the first theory in the list above.
But this move does nothing to address the second theory in the list above. MOHELA is a servicer of DLP loans that are eligible for the student loan forgiveness. It does not have an ownership stake in those loans like it does in FFELP loans. But it still has an interest in them as a servicer and would have to take costly actions to comply with the Biden debt forgiveness plan.
4. Racial Motives
The Brown County Taxpayers Association filed a lawsuit that does not attempt to establish that any particular person, business, or government was injured. Instead, their suit argues the following:
The student debt forgiveness plan usurps legislative authority that can only be constitutionally exercised by the legislature.
The student debt forgiveness plan violates the constitutional equal protection doctrine because the administration has explicitly said that one motivation for passing the plan is that it provides disproportionately high benefits to black people.
The student debt forgiveness plan is a rule that should have been passed through the processes of the Administrative Procedures Act (APA).
This is the certainly the wackiest of the four lawsuits filed so far.
What to Make of All of This
Remember from above that the core legal argument against the student debt forgiveness is that the HEROES Act that the Biden administration relies upon does not actually give them the authority to do it. But the procedural challenge is how exactly to get that legal argument in front of a judge without having your lawsuit dismissed for lack of standing.
The fact that the Biden administration made two swift changes to the program in response to these lawsuits — including a very substantial change in cutting FFELP debtors out of relief — suggests that they are not very confident that the courts would side with them on the question of whether the HEROES Act actually allows the executive to do a student debt forgiveness of this sort. So they are trying to avoid litigating that question by changing the program to undercut theories of standing that get presented in the courts.
But opponents only need to win one theory of standing in order to get the underlying legal issue to a court. And right now there is at least one such theory that appears fairly viable, which is that the state of Missouri has a publicly-owned debt servicer (MOHELA) that currently services $59 billion worth of DLP loans that will be injured by the policy change. Unless the DOE can come up with some kind of carveout to ensure that MOHELA, as a DLP servicer, is unaffected by the student loan forgiveness plan, this may be the standing theory that squeaks through.