Biden’s Student Loan Plan Could Face a Protracted Legal Fight

WASHINGTON — The Biden administration’s student loan forgiveness initiative is poised to face an array of legal challenges that could freeze the plan before it gets up and running, threatening a policy that has stirred fierce bipartisan debate and infighting among Democrats.

The plan announced by the White House last week would wipe out significant amounts of debt for millions of Americans. Those earning less than $125,000 per year would have $10,000 in debt erased, and those who received Pell grants would get $20,000 in debt relief.

While it fulfills one of President Biden’s campaign promises to help graduates who have fallen behind in their payments, the plan carries a significant cost — projected to be between $300 billion and $500 billion — to the federal government, which will not receive repayments that it is currently owed.

Enacting such a major fiscal outlay through emergency executive powers has raised questions about whether Mr. Biden has the authority to carry out such a policy on his own, and many expect lawsuits and a protracted legal battle, including by those who stand to lose financially from the plan. Those who might try to claim such damages could include loan servicers who are missing out on processing fees or lawmakers who view the policy as an infringement on congressional budgetary authority.

Financial services trade groups, scholars and think tank experts have spent the past several days trying to determine if the White House initiative is on sound legal footing or if it could be ripe for court challenges.

Some critics have compared Mr. Biden’s move to similar executive actions undertaken by former President Donald J. Trump, including his use of emergency powers to fund a border wall in 2019. Although that was different than canceling federal debt, opponents of the decision argued that Mr. Trump was abusing his authority by transferring Pentagon funds to pay for wall construction without congressional approval. The Supreme Court allowed the construction to go forward while the case worked its way through lower courts, but Mr. Biden halted work on the barrier upon taking office.

Because of the expectation of a legal fight, some have warned that borrowers expecting forgiveness should not yet get their hopes too high.

“Blanket student loan forgiveness is undoubtedly an act of economic and political significance, and the likelihood it is upheld within the president’s authority is dubious,” said Lanae Erickson, senior vice president for social policy, education and politics at The Third Way, a center-left policy think tank. “It is incumbent upon the advocates and policymakers who pushed to take this unprecedented step to also communicate to borrowers that there is a strong chance it will never come to fruition.”

Previous efforts by the Biden administration to forgive debts have already run into legal obstacles. A $4 billion debt relief program for “socially disadvantaged” farmers was frozen last year amid challenges, prompting Congress to ultimately rewrite the program in subsequent legislation that passed last month.

One of the main questions revolving around the student loan program is who — if anyone — has the legal “standing” to claim that they have been harmed by the policy and are entitled to file a lawsuit. The most likely outcome, legal experts say, is that banks or loan servicers who stand to lose money from fees that they would have been scheduled to collect file suits. Since many borrowers would owe less money overall, the amount that they pay each month to companies that manage loan payments would also shrink.

What to Know About Student Loan Debt Relief

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What to Know About Student Loan Debt Relief

Many will benefit. President Biden’s executive order means the federal student loan balances of millions of people could fall by as much as $20,000. Here are answers to some common questions about how it will work:

What to Know About Student Loan Debt Relief

Who qualifies for loan cancellation? Individuals who are single and earn $125,000 or less will qualify for the $10,000 in debt cancellation. If you’re married and file your taxes jointly or are a head of household, you qualify if your income is $250,000 or below. If you received a Pell Grant and meet these income requirements, you could qualify for an extra $10,000 in debt cancellation.

What to Know About Student Loan Debt Relief

What’s the first thing I need to do if I qualify? Check with your loan servicer to make sure that your postal address, your email address and your mobile phone number are listed accurately, so you can receive guidance. Follow those instructions. If you don’t know who your servicer is, consult the Department of Education’s “Who is my loan servicer?” web page for instructions.

What to Know About Student Loan Debt Relief

How do I prove that I qualify? If you’re already enrolled in some kind of income-driven repayment plan and have submitted your most recent tax return to certify that income, you should not need to do anything else. Still, keep an eye out for guidance from your servicer. For everyone else, the Education Department is expected to set up an application process by the end of the year.

What to Know About Student Loan Debt Relief

When will payments for the outstanding balance restart? President Biden extended a Trump-era pause on payments, which are now not due until at least January. You should receive a billing notice at least three weeks before your first payment is due, but you can contact your loan servicer before then for specifics on what you owe and when payment is due.

“Everything is subject to litigation, so I’m sure there will be some swings at this,” said Jayne Conroy, a plaintiff’s attorney at the law firm Simmons Hanly Conroy.

Ms. Conroy said that loan servicers could have contracts with commitments about the longevity of loans that could be breached by the debt cancellation. Some servicers, she suggested, could claim that their competitors benefited from the Biden administration’s policy.

Banks have so far said little about the policy as they await additional details from the Department of Education about how the loan forgiveness will work. But an official from one financial services industry group, who asked to remain anonymous while discussing internal deliberations, said private lenders were monitoring the implementation of the debt relief with their legal teams to determine if lawsuits are the appropriate course of action.

Republican-led states could also try to intervene, though it is less clear what basis they would have to object. Some attorneys general have warned that they are planning a legal challenge.

“I am ready to join with other Attorneys General, or if I have to go alone, to take action against President Biden’s latest executive order in regard to student loan debt,” Leslie Rutledge, the attorney general of Arkansas, told the Fox Business Network.

If Republicans retake the House of Representatives next year, they could also try to sue to block the program. Representative Kevin Brady of Texas, the top Republican of the Ways and Means Committee, said this week that he believed Mr. Biden’s move was illegal.

“I don’t think it passes muster, but I worry the money will be substantially out the door,” Mr. Brady told CNBC. “I don’t know how any president gets a half a trillion dollars just by signing his signature on an executive order.”

The Biden administration issued a memo from the Department of Justice’s office of legal counsel that said that the student loan debt could be canceled under the authority of the Higher Education Relief Opportunities for Students Act of 2003. That law grants the education secretary the power to “alleviate hardship” that federal student loan borrowers are experiencing because of a national emergency, such as the pandemic. It has also been invoked to permit the Education Department to suspend student loan repayments since 2020, an action that Biden administration officials point out has not faced legal challenges.

But some legal scholars warn that basing a broad cancellation of student debt on the pandemic could be a stretch, leaving open the possibility that courts could strike down the policy.

Jed Shugerman, a professor at Fordham Law School, said he was concerned that the Biden administration’s lawyers were “sloppy” in using the 2003 law as a basis for such sweeping debt forgiveness. He predicted that the policy would be frozen.

“My guess is that one of these private banks will go to a Federal District Court with a favorable judge and there will be a nationwide injunction that stops this program from going into effect,” Mr. Shugerman said.

More on Student Loan Debt Relief

  • A Hard Sell: At the White House and aboard Air Force One, advocates of debt cancellation made a sustained push to win over President Biden. Here’s how he finally gave in.
  • Limits Of Biden Tools: The student loan plan is the latest example of Democrats practicing the art of the possible on the nation’s most pressing economic challenges — and ending up with risky or patchwork solutions.
  • Who Will Benefit?: The big winners from Mr. Biden’s student loan plan are not rich graduates of Harvard and Yale, as many critics claim. It’s the middle class — and disproportionately young and Black people.
  • Snapping Back at Critics: In an aggressive turn, the normally staid White House Twitter account itemized hundreds of thousands of dollars in Covid-related debt relief given to House members who criticized the plan.

Mr. Shugerman added that, although he believes the ambition of the policy is admirable, it is hypocritical of Democrats to invoke emergency powers to enact policy similar to those the Trump administration used for actions on immigration.

“If Democrats were outraged by the Trump administration’s abuse of emergency powers, why are they tolerating it as a matter of principle?” he said.

Biden administration initiatives have faced difficulty in the courts over the last year.

A $4 billion debt relief program for “socially disadvantaged” farmers was frozen last year amid legal challenges and was ultimately rewritten in the so-called Inflation Reduction Act that Congress passed last month.

Requirements in the American Rescue Plan that Congress passed last year that prohibited states from using relief money to subsidize tax cuts faced lawsuits from states and courts, blocking the Biden administration from enforcing that provision of the law.

And the Supreme Court last year ended the Biden administration’s eviction moratorium, ruling that it was improperly relying on an old statute to give the Centers for Disease Control more power than Congress intended.

Mr. Biden himself has previously expressed reservations about how far he could go to wipe out student debt unilaterally.

During an event hosted by CNN last year, he said that he did think he could write off $10,000 of debt but that $50,000 would be going too far.

“I don’t think I have the authority to do it by signing the pen,” Mr. Biden said.

The White House did not respond to requests for comment about the likelihood of litigation. At a briefing last week, Bharat Ramamurti, deputy director of the White House’s National Economic Council, said he believed that the Biden administration was on “very strong legal ground.”

“Of course, people can challenge actions in court,” Mr. Ramamurti said. “It’s going to be up to the courts to decide whether those are valid claims or not.”

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