Written By Adam S. Minsky, JD
As President Biden tries to move on from the Supreme Court ruling in June that struck down his unprecedented student loan forgiveness plan, the administration is encountering more legal hurdles.
The Education Department is in various stages of implementing new loan forgiveness initiatives. These programs are intended to provide relief to borrowers in the wake of the Supreme Court decision, and they are being rolled out just as student loan payments are set to resume.
But new challenges could imperil these efforts. Here’s a breakdown.
New lawsuit seeks to block student loan forgiveness under one-time adjustment
A coalition of conservative organizations filed a lawsuit last week in federal court in Michigan to try to stop the Biden administration from implementing nearly $39 billion in student loan forgiveness under the IDR Account Adjustment. The Education Department had just notified over 800,000 borrowers in July that they qualify for student debt relief under the program.
The IDR Account Adjustment allows the Education Department to credit borrowers with past loan periods toward loan forgiveness under IDR and PSLF that would not have counted under previous rules. This includes nearly any period of repayment on any federal student loan (regardless of whether payments were actually made), as well as some periods of deferment and forbearance. The adjustment is designed to remedy past problems with the IDR program including poor communication by loan servicers and poor oversight by the federal government, leading borrowers to be steered into costly forbearance programs or losing credit toward loan forgiveness.
Despite the IDR Account Adjustment's helpful impact since it was put into effect, challengers try to cite standing
The IDR Account Adjustment was first announced over a year ago, and many PSLF borrowers have already benefited from the retroactive credit. The Education Department is now applying the adjustment to borrowers who have reached the 20- or 25-year threshold for student loan forgiveness under IDR programs. These are the borrowers who were notified in July that they qualify.
The new lawsuit is seeking to block this relief. The challengers also want the court to stop the Biden administration from providing borrowers with any further IDR and PSLF credit under the initiative, and to rule that the program is illegal.
The challengers may face an uphill battle to obtain the relief that they are seeking. The organizations may have difficulty demonstrating that they have standing, because the injury that they are claiming – a devaluing of PSLF that will result in nonprofit organizations having difficulty recruiting employees in the future – is rather tenuous and speculative. The Education Department is also likely to point out the fact that the organizations waited well over a year to initiate the challenge, which contradicts the argument that the program presents an imminent threat to these organizations. The court may have to consider the fact that the adjustment is well underway, and hundreds of thousands of borrowers have already taken steps in reliance on the initiative.
Still, it is too soon to know how this legal challenge will play out. If a court strikes down the IDR Account Adjustment, it could block millions of borrowers from receiving student loan forgiveness credit, and undercut the Biden administration’s efforts to remedy past injustices for student loan borrowers.
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Federal appeals court blocks new student loan forgiveness rule
In a significant legal setback for the Biden administration, earlier this week, the 5th Circuit Court of Appeals granted a nationwide injunction to block the Education Department’s new Borrower Defense to Repayment rules. The Borrower Defense program allows federal student loan borrowers to request a discharge of their student debt if their school engaged in misrepresentations about admissions, career prospects, or other core aspects of the educational program.
The new rules that went into effect in July replaced a prior regulatory regime enacted under the Trump administration. The Biden administration’s rewrite of the rules was designed to make it easier for borrowers to qualify for Borrower Defense relief. The regulatory changes expanded the definition of misconduct that would qualify borrowers for loan discharge, banned mandatory arbitration, and made it easier for the Education Department to provide group relief to cohorts of borrowers who experienced similar misconduct.
But the 5th Circuit’s ruling prohibits the Education Department from applying these new rules. Borrower Defense to Repayment remains an option, but the department will be forced to apply to Trump administration rules. This may limit the relief available for many borrowers.
The administration has limited avenues to get around the 5th Circuit ruling. The Education Department could appeal to the Supreme Court, but it’s unclear if the Court would even accept the appeal and, if so, whether the conservative majority would be amenable to the administration’s arguments. The department can also fight the ruling on the merits at the 5th Circuit, since the injunction is just preliminary. However, the issuance of the preliminary injunction suggests that the court is inclined to rule against the administration.
The Biden administration could proceed with a brand new rewrite of the Borrower Defense rules, essentially starting from scratch. This would likely take a year or longer. However, the Trump administration had to go through the same process when that administration’s initial Borrower Defense rules were rejected by a federal court.
New student loan forgiveness backup plan will go through long process
Last month, the Biden administration started the process of crafting a new student loan forgiveness plan under a different legal authority to try to bypass the legal problems associated with the administration’s initial plan that the Supreme Court rejected.
The administration’s first loan forgiveness plan was issued under the HEROES Act of 2003, which provides emergency authority for the Secretary of Education to “modify” or “waive” key federal student loan provisions. The Supreme Court interpreted “modify” and “waive” in a narrow way, effectively eliminating this statute as a tool for massive student debt relief.
Instead, the administration will try again using the compromise and settlement authority under the Higher Education Act, or HEA. Unlike the HEROES Act, the HEA already has a track record of providing loan cancellation, including for groups of borrowers, although in far more limited circumstances (such as through settlements of class action litigation).
But unlike the HEROES Act, which allows the department to modify federal student loan programs relatively quickly in response to a national emergency, the HEA requires the administration to go through a long legal process called “negotiated rulemaking.” This involves multiple rounds of public hearings and comment periods, whereby a committee of key stakeholders must draft and revise proposed regulations.
The negotiated rulemaking process officially began in July with an initial public hearing. But it will be months before details of this student loan forgiveness “Plan B” come into focus. And once the final regulations are issued – likely sometime in the last half of 2024 – it will almost certainly face fresh legal challenges.
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