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Legal Challenges Mount for Biden’s Student Loan Forgiveness Plan

As the Biden administration prepares to roll out a sweeping new student loan forgiveness plan in the coming weeks, the Education Department faces legal challenges. And borrowers are already seeing the effects.

Here’s the latest.

Background: Biden’s student loan forgiveness plan

President Biden announced in August an unprecedented student loan forgiveness initiative. Under this plan, the Education Department says it will eliminate either $10,000 or $20,000 in federal student loan debt for borrowers, depending on whether they received a Pell Grant. Borrowers are eligible if they earn below the income caps ($125,000 for single borrowers and $250,000 for married borrowers) in either 2020 or 2021.

Education Department officials estimated that 40 million borrowers might ultimately benefit, with nearly half of them seeing their federal student loans wiped out completely.

But Republican lawmakers and conservative legal organizations have expressed deep opposition to Biden’s student loan forgiveness initiative. They actively seek ways to potentially block its implementation through litigation in federal court.

“This is a slap in the face” to borrowers who paid off their loans or did not go to college, suggested Rep. Virginia Foxx (R-NC) in a statement in August. Foxx is the Republican minority leader on the House Education and Labor Committee.

“You lack the authority to wield unilateral action to usher in a sweeping student loan cancellation plan,” warned a coalition of Republican governors in a letter to President Biden earlier this month, arguing that the plan would drive up inflation.

Now, some of this opposition is translating into very real legal challenges.

Earlier this week, the Pacific Legal Foundation, a conservative legal organization, filed a lawsuit against the Biden administration seeking to halt the loan forgiveness plan. The Plaintiff named in the case, who claims to be an Indiana resident, argued that his home state of Indiana would tax him on student loan forgiveness. He further argued that this would be harmful because he is on track for Public Service Loan Forgiveness (PSLF), which can result in complete, tax-free loan forgiveness.

The Plaintiff focused on potential state tax liability to establish standing — a legal concept whereby a person suing in federal court must show a concrete injury sufficiently connected to the challenged act, law, or policy.  

However, the Education Department quickly noted that no borrower would be forced to receive student loan forgiveness under the initiative, and borrowers would have an option to opt-out. Other legal advocates noted that even the state tax claim might be somewhat dubious, as Indiana lawmakers could amend the state tax code, and other tax exemptions could come into play which might offset any resulting tax liability.

In a legal filing earlier this week, the Education Department notified the court that it “has already taken steps to effectuate Plaintiff’s clearly stated desire to opt out of the program and not receive $20,000 in automatic cancellation of his federal student loan debt, and so notified Plaintiff’s counsel today.”

Based on that assertion, the court subsequently denied the Plaintiff’s request for an injunction to freeze the student loan forgiveness plan pending the final outcome of the litigation, finding that the Plaintiff lacked standing.

Education Department tries to preempt new suit from FFEL lenders, but some borrowers pay the price

On September 29, 2022, in response to a potential new legal challenge, the Education Department abruptly changed the eligibility rules governing the new onetime student loan forgiveness initiative.

Previously, Education Department guidance had advised borrowers with commercially held FFEL loans they could consolidate those loans into a Direct consolidation loan to qualify for relief. Only government-held federal student loans qualify, so commercially held FFEL loans would be excluded unless consolidated into a Direct (government-held) loan.

But yesterday, the Biden administration abruptly reversed course.

“As of Sept. 29, 2022, borrowers with federal student loans not held by ED cannot obtain one-time debt relief by consolidating those loans into Direct Loans,” wrote the Education Department in updated guidance that did not include any formal announcement or advanced warning. “[Only] Borrowers with FFEL Program loans and Perkins Loans not held by ED who have applied to consolidate into the Direct Loan program prior to Sept. 29, 2022, are eligible for one-time debt relief through the Direct Loan program.”

Related: FFELP Loan Forgiveness Options

The administration’s reversal appears to be related to the concern that some FFEL lenders might file a lawsuit alleging that the cancellation program encourages FFEL borrowers to consolidate and leave the FFEL system, depriving them of revenue. This could potentially give these lenders a more solid standing argument than the Plaintiff in the Pacific Legal Foundation case. By cutting out commercially held FFEL loans from eligibility, the Biden administration appears to be trying to narrow the scope of coverage to loans already held by the government to neutralize this potential legal threat.

If successful, these efforts may preserve the loan forgiveness program for most of the 40 million borrowers who would qualify. But the Education Department estimates that around 700,000 to 800,000 borrowers may lose eligibility as a result.

Officials are “assessing whether there are alternative pathways to provide relief to borrowers with federal student loans not held by ED, including FFEL Program loans and Perkins Loans, and are discussing this with private lenders.”

Several republican-led states file suit over student loan forgiveness

Also, this week, a coalition of six Republican-led states filed a new lawsuit against the Biden administration, arguing that Biden’s student loan forgiveness plan is illegal and is “not remotely tailored to address the effects of the pandemic on federal student loan borrowers,” which they say is required under the HEROES Act of 2003 — the statutory basis for the President’s actions. This suit also points to the FFEL program as a potential source of standing.

Advocacy groups for student loan borrowers slammed the new suit.

“This suit is just the latest chapter in a long history of student loan companies… and their Republican allies cheating people with student debt out of their rights,” said the Student Borrower Protection Center in a statement.

“The student loan industry has made it painfully clear to the American people that they will stop at nothing to protect their profits. For decades, borrowers, advocates, and law enforcement officials have raised the alarm on the student loan industry’s illegal and deceptive practices—including in a scathing report from a federal regulator unveiled just today exposing new evidence of mismanagement and abuse across the student loan system.”

The suit is in its very early stages. It is unclear what the outcome might be or whether the Biden administration’s recent change to eligibility rules for FFEL borrowers may make a difference.

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