Written By Travis Hornsby, CFA®, CFP®
The Supreme Court struck down student debt cancellation on June 30, 2023. The Court found that Missouri could sue on behalf of MOHELA, and the six conservative justices then proceeded to completely reject the administration's argument that their program was legal.
In response later that afternoon, President Biden directed the Department of Education to try and cancel debt through a different law called the Higher Education Act.
We’ll discuss what this means for you and what President Biden might do next on student loans.
The key ingredient in the cancellation case: Standing for Missouri to sue
There are two steps to a lawsuit. First, a party that’s suing must establish standing, which means that they can prove an economic injury.
If, and only if, that step is achieved, then the judges or justices can move to the merits of the case.
The justices found that MOHELA had a clear injury to sue over. If cancellation had happened, MOHELA would have lost millions of customers. They also would have lost all the future servicing revenue from managing these borrower accounts.
The state of Missouri, controlled by Republican leadership, sued on behalf of MOHELA to block student debt cancellation.
The Supreme Court found that Missouri passed the test of standing, and then the Court proceeded to the merits.
Opinion finds that the Secretary has the power to “waive or modify,” not to transform
Once the Court found that Missouri had standing, that was the ball game.
Chief Justice Roberts proceeded to write the opinion of the Court, saying:
“The Secretary asserts that the HEROES Act grants him the authority to cancel $430 billion of student loan principal. It does not. We hold today that the Act allows the Secretary to “waive or modify” existing statutory or regulatory provisions applicable to financial assistance programs under the Education Act, not to rewrite that statute from the ground up […] The Secretary’s plan has “modified” the cited provisions only in the same sense that “the French Revolution ‘modified’ the status of the French nobility.”
-Chief Justice Roberts
Could President Biden seek to cancel student debt through a different law or statute?
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Why cancellation will likely not happen through another law
Since the Court found that Missouri has standing to sue on behalf of MOHELA, that same avenue is available to block any other cancellation program that President Biden comes up with, specifically one using the Higher Education Act.
That said, Biden has attempted to extend economic relief under programs like the eviction moratorium – which the Court said he couldn’t do — while knowing that it would be struck down.
Biden tries to cancel debt anyway
President Biden announced on June 30, 2023, that he would attempt to cancel student debt a different way anyway, through the Higher Education Act. If he fails, the political bet is that he will be able to blame the Court instead of disappointing borrowers.
The Fiscal Responsibility Act (FRA) requires payments to start August 30, 2023. The Higher Education Act cancellation program requires negotiated rulemaking with a notice and comment period. This will probably push any decision on cancellation through this act past the next presidential election, which presumably is the point.
Biden wants to make student loan cancellation a campaign issue to keep young voters energized since his approval ratings among younger progressive voters are lower than other constituencies.
We expect cancellation through the Higher Education Act to be blocked if it ever reaches the Supreme Court.
New IDR (aka the SAVE Plan) will be the focus after the student loan cancellation case
With this ruling blocking cancellation, the stakes are now extremely high for President Biden’s New Income Driven Repayment (IDR) plan.
Under the current proposal, borrowers would be able to:
- Pay 5% to 10% of AGI after deducting 225% of the poverty line
- File taxes separately and exclude their spouse’s income (if married)
- Receive forgiveness after 10 years, if they owe less than $12,000 (instead of 20 or 25 years)
Will Biden make New IDR more generous in response to losing on cancellation?
Biden could easily raise the threshold for 10-year forgiveness from $12,000 to $32,000 (adding the $20,000 he planned to cancel on top of that threshold).
This would accomplish a similar outcome as canceling $10,000 to $20,000 for everyone and would likely stand up to legal scrutiny.
He could also raise the percentage of the poverty line a borrower can deduct before paying anything.
That said, his New IDR Plan (called the SAVE Plan) has already been approved by the Office of Management and Budget, so, theoretically, it’s locked in.
It's possible that he's initiated an attempt to cancel student debt by the Higher Education Act, in order to draw attention away from his New IDR plan.
Legal challenges anticipated for New IDR
There could be legal challenges to this New IDR plan, especially given the Court's skepticism about Biden's student loan cancellation.
It’s more difficult to imagine a successful challenge against New IDR, though, due to the clearly articulated authority of the President to create income-driven repayment plans through the ICR statute.
What kind of legal challenge against New IDR might succeed?
A party to a lawsuit would need to show that the New IDR plan rule would harm them economically.
Anonymous sources suggest that the current version of New IDR would not draw a lawsuit from private lenders.
New IDR would keep borrowers in debt longer, with more going for forgiveness. This makes its revenue positive for the servicers, so MOHELA would not have standing.
Expect lawsuits against President Biden's New IDR Plan, but expect this repayment plan to be more protected from lawsuits than the cancellation program was.
What will Biden do next after losing on cancellation?
Republicans in the House and Senate have both put forward very different proposals for reforming the IDR repayment plans and the student loan system.
That said, the proposals aren't even that similar to each other, and proposals like capping student debt limits will likely be a non-starter for Democrats.
President Biden also has no incentive to compromise unless his New IDR rule was shot down by a legal challenge.
So the most likely scenario is that we will need to await the final rule of President Biden's New IDR plan.
If that rule is the same as his initial proposal, it's likely going to stand. If it's made significantly more generous in response to losing on cancellation, it would likely draw a lawsuit from business interests of some kind, such as private student loan lenders.
It's likely that we will continue with the current complex system, until one party has control of Congress and the presidency, which could happen after the 2024 election.
Even then, you need 60 votes in the Senate to agree on a Higher Education Act reauthorization, which hasn’t happened in more than 10 years, due to a lack of agreement on how to reform the student loan system, even among more moderate members of Congress.
We will now also await a decision from the Supreme Court on cancellation through the Higher Education Act, though a decision like this could take some time to work its way through the legal system.
Remember that many borrowers can currently save an enormous amount of money through the many programs and initiatives currently available, such as the IDR Waiver and the coming New IDR plan.
If you feel like you need help navigating these programs, our expert team at Student Loan Planner can help. Please use the button below to schedule a consult.
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