Lawsuit Highlights the Shaky Legal Future of Biden’s Student Loan Forgiveness Plan

A conservative law organization has launched the first major legal challenge to President Biden’s $400 billion student loan debt forgiveness plan, calling the policy “flagrantly illegal” because it wasn’t authorized by Congress.

Biden’s plan would wipe out the student loan debt of 20 million borrowers, and reduce the debt of 23 million more, but the lawsuit claims that it financially harms the borrowers in seven states whose debt cancellation will be taxed.

Some legal experts expect this lawsuit to be thrown out based on the legal standing of the plaintiff—an attorney for the Pacific Legal Foundation, which brought the challenge. However, it’s just the first of many likely attempts to stop the loan forgiveness program.

Jed Shugerman, a professor at Fordham Law School who studies executive branch power, warns that Biden’s use of national emergency powers to cancel student debt could mean the policy will be struck down if future challenges reach the Supreme Court.

Under Biden’s plan, borrowers who make less than $125,000 per year will receive up to $10,000 in federal student loan forgiveness. Borrowers who attended college with Pell Grants, designed to help low-income students, are eligible for up to $20,000 in forgiveness if they meet the same income requirements.

The lawsuit, Garrison v. U.S. Department of Education, was filed in the U.S. District Court for the Southern District of Indiana on Tuesday.

Who is suing?

The lawsuit’s plaintiff is Frank Garrison, a Pacific Legal Foundation attorney in Indiana who received a Pell Grant to attend college and qualifies for $20,000 in debt forgiveness under Biden’s plan because he makes less than $125,000 per year, according to the complaint.

The lawsuit hinges on the income taxes that will be applied to student debt forgiveness in some states, arguing that debt cancellation will cause Garrison “to incur a financial obligation that he would not otherwise have faced.”

Garrison has been paying off his student loans through the Public Service Loan Forgiveness (PSLF) program, which offers debt forgiveness to borrowers who pursue public-service careers. And he expected to receive full forgiveness through the PSLF program in about four years, according to the lawsuit.

Under Biden’s original plan, about eight million borrowers who qualify for debt forgiveness and whose financial information is already on file with the Department of Education, including Garrison, will have forgiveness automatically applied to their accounts beginning in October.

He argues that’s a problem because he’ll have to pay income taxes on that debt forgiveness. Seven states, including Indiana, are planning to tax student debt forgiveness as income, according to an analysis by the Tax Foundation, an independent nonprofit focused on tax policy.

Garrison’s lawsuit claims that while his debt forgiveness would not be taxed if he continued under the PSLF program, he will owe more than $1,000 in income taxes if he automatically receives $20,000 in forgiveness under Biden’s plan.

“Frank will be stuck with a tax bill that makes him financially worse off than continuing with his repayment program under PSLF,” the Pacific Legal Foundation said in a press release. “He did not ask for cancellation, doesn’t want it, and has no way to opt out of it.”

But the White House announced Tuesday that borrowers will have the chance to opt out if they don’t want to receive debt relief. White House Press Secretary Karine Jean-Pierre said the Department of Education would release more information on how to do that before the program launches. “But the bottom line is this: No one who does not want debt relief will have to get that debt relief,” she said.

Shugerman says he believes Garrison has weak legal standing because he will be able to opt out of debt forgiveness. And he says the Biden Administration would have an even stronger case if they required borrowers to opt in to receive debt relief. “If the final policy has an opt-in [feature], then someone like this plaintiff really has no claim of standing,” Shugerman says. “If I were in the Biden Administration, I would be finalizing an opt-in feature.”

Will this delay student loan forgiveness?

The Pacific Legal Foundation filed a temporary restraining order to stop the loan forgiveness plan from taking effect. But a judge has yet to rule on that order.

While the lawsuit argues Biden lacked the authority to cancel student debt, the Biden Administration has argued the President has the authority to cancel student debt under the Higher Education Relief Opportunities for Students (HEROES) Act of 2003.

The law gives the U.S. Education Secretary the authority to change student financial assistance programs during a war, military operation or a “national emergency” — in this case, the COVID-19 pandemic.

“Congress did not authorize the executive branch to unilaterally cancel student debt,” Caleb Kruckenberg, an attorney at Pacific Legal Foundation, which brought the lawsuit, said in a statement. “It’s flagrantly illegal for the executive branch to create a $500 billion program by press release, and without statutory authority or even the basic notice and comment procedure for new regulations.”

The lawsuit references a Penn Wharton Budget Model analysis, which estimates Biden’s plan will cost up to $519 billion over 10 years. A report by the Congressional Budget Office, published Monday, estimated the plan could cost about $400 billion

Biden himself may have undermined the legal standing of the student loan forgiveness plan when he said that “the pandemic is over” in a recent 60 Minutes interview.

Shugerman, who supports student loan forgiveness, thinks Biden has the authority to cancel student debt, but hasn’t used the right legal justification for it, which could open the policy up to stronger challenges in the future from plaintiffs with a better claim to legal standing. (A loan servicing company, for example, could argue that they were directly affected by the policy if it lost money on office space and employees when student loans were canceled.)

He thinks that Biden could instead justify student-debt forgiveness under the Higher Education Act of 1965, which allows the Department of Education to waive debts—an argument he thinks would stand a better chance if this issue makes it to the U.S. Supreme Court.

Last year, the Court struck down a national moratorium on evictions that the Biden Administration had defended with a similar argument about the pandemic’s national emergency. The decision hints at how the Supreme Court could rule on student debt relief, if the policy is justified under HEROES Act.

“This one will lose at some point,” Shugerman says of the Pacific Legal Foundation’s lawsuit. “I’m worried about another one.”