Legal Challenges To The President’s Student Loan Forgiveness Plan

So far, plaintiffs have filed four lawsuits that seek to block President Biden’s student loan forgiveness plan. 

These lawsuits present several arguments concerning the legality of the President’s plan. However, before the courts can consider the merits of these arguments, the plaintiffs must demonstrate that they legal standing to bring the lawsuits.

If a plaintiff does not have legal standing, the merits of their legal arguments do not matter.

We break down the legal challenges to the President’s loan forgiveness plan, as well as cover some of the other legalities and criticisms of it.

What Is Legal Standing?

To demonstrate that they have legal standing to bring a lawsuit, a plaintiff must demonstrate that they will be harmed by the President’s student loan forgiveness plan. The harm must be certain, immediate and definite, not speculative. 

Taxpayers do not have legal standing because of the 2007 U.S. Supreme Court ruling in Hein v. Freedom From Religion Foundation, Inc., 551 U.S. 587, 593.

Borrowers who do not qualify for student loan forgiveness cannot demonstrate that they are harmed. Also, the Higher Education Act of 1965 does not provide borrowers with a private right of action.

It is likewise difficult for a state government to demonstrate that they are harmed.

There are, however, a few possibilities where plaintiffs may be able to demonstrate that they are harmed by the President’s plan:

• Loan servicers in the William D. Ford Direct Loan Program will potentially lose some servicing revenue because of reduced loan volume. However, the servicing contracts do not guarantee them a minimum number of borrowers. (The Student Aid and Fiscal Responsibility Act (SAFRA), which was enacted as part of the Health Care and Education Reconciliation Act of 2010 (P.L. 111-152), guaranteed 100,000 borrowers each to not-for-profit student loan servicers, subject to performance adjustments. This requirement was repealed by the Bipartisan Budget Act of 2013 (P.L. 113-67).) The reduction in servicing volume is also temporary, as the President’s plan forgives only about a quarter of outstanding federal student loan volume, which will return to current levels in just 4-5 years of new lending.
• Lenders, guarantee agencies and servicers in the Federal Family Education Loan Program (FFELP) will experience a decrease in loan volume as borrowers consolidate their loans into the Direct Loan program to qualify for forgiveness. But, then why did they file a lawsuit to block the President’s plan and not the Limited PSLF Waiver, which has the same effect?
• Members of Congress may be able to demonstrate legal standing. However, such a lawsuit may need to be filed by the House of Representatives or the Senate, as opposed to individual members of Congress. If Republicans take over the House or Senate during the mid-term elections, they’d be able to file a lawsuit in January 2023. But, the bulk of the student loan forgiveness will potentially have already occurred by then. 

Republicans might file multiple lawsuits in multiple jurisdictions, under different legal theories, in the hope that one of them is successful in demonstrating legal standing, or at least potentially get an injunction or temporary restraining order to delay implementation with the hope that they successfully win a majority in a house of Congress.

Related: How Much Money Do Student Loan Servicers Make?

The Four Lawsuits

Four lawsuits, so far, have been filed to try to block the President’s student loan forgiveness plan.

Pacific Legal Foundation

On Tuesday, September 27, 2022, Frank Garrison of the Pacific Legal Foundation filed a lawsuit seeking to block the President’s plan. He said he’d be harmed by the President’s plan because he is working toward Public Service Loan Forgiveness, which is tax-free on Indiana state income tax returns, but the President’s plan is taxable under current Indiana law.

The U.S. Department of Education countered by saying that he can opt out of the automatic student loans forgiveness. Borrowers are not required to accept student loan forgiveness, even when the forgiveness is automatic. 

Allowing borrowers to opt out of automatic student loan forgiveness programs is not a new policy. The U.S. Department of Education used a similar process for automatic disability discharges. When a borrower qualifies for a total and permanent disability discharge based on VA or Social Security Administration data matches, the U.S. Department of Education notifies the borrower about the pending discharge of their loans and gives them the ability to opt out. 

On Thursday, September 29, 2022, the U.S. District Court for the Southern District of Indiana, Indianapolis Division, denied the plaintiff’s request for a temporary restraining order and gave him until October 10, 2022 to file an amended complaint.

Six State Attorneys General

On Thursday, September 29, 2022, six state attorneys general for Arkansas, Iowa, Kansas, Missouri, Nebraska and South Carolina filed a lawsuit which argued that they have legal standing because state loan agencies who hold or service FFELP loans would be negatively impacted when borrowers consolidate FFELP loans to qualify for forgiveness. Investors in student loan securitizations and bond issues would also be harmed by an increase in refinancing, but investors are not a party to the lawsuit. 

The U.S. Department of Education responded with by eliminating the ability of borrowers with commercially-held FFELP loans to consolidate their loans to qualify for the President’s plan, limiting eligibility to loans for which the borrower applied for consolidation prior to September 29, 2022. This change in policy appears on StudentAid.gov in the “Which Loans Are Eligible?” section of the One-Time Student Loan Debt Relief page. 

This means that subsidized loans, unsubsidized loans, parent PLUS loans, and graduate PLUS loans held by ED are eligible. Consolidation loans are also eligible for relief, as long as all of the underlying loans that were consolidated were ED-held loans and were disbursed on or before June 30, 2022. Additionally, consolidation loans comprised of any FFEL or Perkins loans not held by ED are also eligible, as long as the borrower applied for consolidation before Sept. 29, 2022.

This change in policy eliminates legal standing for the six state attorneys general, since it occurred prior to implementation of the student loan forgiveness proposal. 

A hearing has been scheduled for Tuesday, October 4, 2022 on the plaintiff’s request for a temporary restraining order. The U.S. Department of Education said that no borrowers will have their loans forgiven before October 17, 2022.

Arizona Attorney General

On Thursday, September 29, 2022, the Arizona attorney general filed a lawsuit arguing that he has legal standing because the President’s plan reduces the effectiveness of Public Service Loan Forgiveness (PSLF) as a recruiting and retention tool, because it reduces or eliminates the student loan debt of current and future employees. 

He also said that the President’s plan will reduce future tax revenue, increase inflation, and increase the state’s borrowing costs. He also said that it will increase enforcement costs because of the need to crack down on student loan debt relief scams. 

Wisconsin Institute for Liberty & Law

On Tuesday, October 4, 2022, the Wisconsin Institute for Law & Liberty (WILL) filed a lawsuit seeking to block the President’s student loan forgiveness plan on behalf of the Brown County Taxpayers Association. The lawsuit argues that the taxpayer association will be harmed by the President’s plan because they are on the hook as taxpayers for the cost of the forgiveness. 

On October 6, 2022, the U.S. District Court for the Eastern District of Wisconsin dismissed the case for a lack of standing. The court cited the U.S. Supreme Court decision in Hein v. Freedom From Religion Found., Inc., 551 U.S. 587, 593 (2007) and other precedents as part of its ruling. 

Future Lawsuits

There undoubtedly will be other lawsuits beyond the initial four. Some of the subsequent lawsuits may incorporate arguments and insights from the previous lawsuits. 

Flawed Legal Strategy

The first four lawsuits presented a flawed legal strategy, in which the plaintiffs filed lawsuits before the President’s plan had been finalized and implemented. 

Until the U.S. Department of Education forgives a loan or provides a forgiveness application, the details of the President’s plan are still fluid. Until the President’s plan is officially implemented, the details can change. This allows the U.S. Department of Education to respond to legal challenges by changing the terms of the President’s plan, as it did by eliminating the eligibility of commercially-held FFELP loans for the President’s plan. 

In their eagerness to challenge the President’s plan, the plaintiffs revealed their legal strategy too soon, allowing the U.S. Department of Education to counter their claims of legal standing to file a lawsuit. 

Legality Of The President’s Student Loan Forgiveness Plan

In a memo dated August 23, 2022, the day before the President’s plan was announced, the U.S. Department of Justice based arguments for the legality of the President’s plan on the waiver authority in the Higher Education Relief Opportunities for Students Act (HEROES Act) of 2003 (P.L. 108-76), which was enacted in the aftermath of the September 11, 2001 attacks. 

But, the President does not have the legal authority to forgive student loans through an executive order. 

The Biden Administration is relying on an expansive reading of the waiver authority in the Heroes Act of 2003.

The Heroes Act of 2003 does not explicitly authorize the creation of a new student loan forgiveness program. The 2022 U.S. Supreme Court’s ruling in West Virginia v. Environmental Protection Agency (EPA) clarified that the major questions doctrine applies in cases involving “vast economic and political significance” such as “massive spending.” It requires clear and unambiguous statutory text authorizing a specific agency action. As the 2001 U.S. Supreme Court ruling in Whitman v. American Trucking stated, Congress does not “hide elephants in mouseholes.” 

Only Congress has the power of the purse, per Article I, Section 7, Clause 7 of the U.S. Constitution and the Antideficiency Act, and Congress did not authorize spending hundreds of billions of dollars on a new loan forgiveness program through the Heroes Act of 2003. The separation of powers restricts the authority to appropriate funds to Congress, not the executive branch. 

Congress has previously enacted other student loan forgiveness plans, including Public Service Loan Forgiveness in 2007, Teacher Loan Forgiveness in 1998, the Closed School Discharge in 1992, the Total and Permanent Disability Discharge in 1972, and the Death Discharge in 1972. Members of Congress have proposed legislation for a broad student loan forgiveness program similar to the President’s plan, but none of these bills have been reported out of committee. The President cannot use an executive order to bypass the failure of Congress to act.

The President’s plan also fails to satisfy the requirements of the Heroes Act of 2003.

•  The Heroes Act of 2003 limits the waiver authority to ensuring that affected individuals “are not placed in a worse position financially”. Not worse off does not mean better off. The payment pause and interest waiver, which was also justified by the Heroes Act of 2003, put eligible loans in hibernation, so that the loans will be the same when repayment restarts as they were prior to the pandemic. Student loan forgiveness, on the other hand, puts borrowers in a better financial position by reducing the loan balance. 
• The Heroes Act of 2003 defines “affected individual” as someone who has “suffered direct economic hardship as a direct result of … a national emergency.” The President has not limited the student loan forgiveness to borrowers who experienced direct economic hardship as a result of the pandemic. Targeting the President’s plan by income is not the same as targeting it based on a decrease in income. 

Other arguments concerning the legality of the President’s plan are based on the Equal Protection Clause of the U.S. Constitution (e.g., the President’s plan was motivated by a stated goal of advancing racial equity and narrowing the racial wealth gap) and the Administrative Procedures Act (e.g., exceeding statutory authority as well as arbitrary and capricious agency action). 

Criticism That Does Not Affect Legality

The lawsuits also present criticism that does not affect the legality of the President’s plan. However, much of this criticism may be flawed. 

• The President’s plan will increase inflation. To affect inflation, loan forgiveness has to change spending. But, the borrowers who are eligible for forgiveness are the ones who were eligible for the payment pause and interest waiver. They haven’t had to make a payment since March 2020. Forgiveness will not lead to an incremental change in spending patterns for these borrowers, so there will be no impact on inflation or the economy. Furthermore, many of these borrowers may have already had payments as low as $0 per month under income-driven repayment plans, meaning their monthly spending habits won’t dramatically change. Even if there were an impact, annual student loan payments for the forgiven student loans total about $30 billion a year, or 0.1% of GDP. That’s not enough to make a big difference. Moreover, the restart of repayment in January 2023 may reduce inflation slightly, by about 0.2% of GDP.
• The President’s plan will increase college costs. It is the availability of student loans, not student loan forgiveness, that affects the ability of families to pay for college. Moreover, most colleges do not consider a student’s willingness or ability to pay for college when setting tuition, only the college’s budgetary needs for tuition revenue net of tuition discounts. College tuition rates will increase, but not because of student loan forgiveness. College tuition rates will increase if they follow the feast-famine cycle of previous economic downturns, where public college tuition increases at above-average rates toward the end of an economic downturn and for a few years afterward.
• The President’s plan favors the wealthy. The President’s plan limits forgiveness to borrowers who earned less than $125,000 (single) or $250,000 (married filing jointly or head of household) in 2020 or 2021. This excludes high-income families, such as borrowers in the top 5% to 10% of income. It also provides up to $20,000 in forgiveness to borrowers who previously received a Federal Pell Grant, up to $10,000 to borrowers who did not receive a Federal Pell Grant. This targets the most forgiveness to low-income borrowers. 87% of the forgiveness dollars will be provided to borrowers who earn less than $75,000 a year.
• The President’s plan will create moral hazard. Moral hazard occurs when students borrow more than they should because they expect someone else to repay their student loans. The one-time nature of the President’s student loan forgiveness plan, and the limited amounts of forgiveness, prevent moral hazard for future student loan borrowers. 
• The President’s plan will cost more than $1 trillion. This estimate comes from Penn Wharton and is inconsistent with the $379 billion estimate from the U.S. Department of Education and the $400 billion estimate from the Congressional Budget Office (CBO). The U.S. Department of Education assumes an 81% take-up rate and CBO assumes a 90% take-up rate. The Penn Wharton estimate includes the cost of the new income-driven repayment plan, which the U.S. Department of Education has the clear legal authority to implement through regulatory change. The Penn Wharton estimate is also based on incorrect assumptions made before the announcement of the President’s plan. Penn Wharton subsequently reestimated the cost of the President’s student loan forgiveness plan, without the income-driven repayment plan, at $519 billion.