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Legal challenges are already threatening student-loan borrowers' access to debt forgiveness

By Jillian Berman

On the same day six GOP-led states filed a suit challenging the plan, the Department of Education changed some of the eligibility requirements for the program

We're still in the early stages of legal challenges to President Joe Biden's plan to cancel student debt for a wide swath of borrowers, but the threat of litigation is likely already limiting some borrowers' ability to receive relief.

The White House's debt forgiveness plan faced its first major legal challenge Thursday, as six Republican-led states filed a lawsuit asking a federal court to block the debt relief plan. On the same day, the Department of Education changed the eligibility requirements for the one-time forgiveness, potentially cutting hundreds of thousands of borrowers out of the initiative, but possibly mitigating the plan's exposure to litigation.

Biden announced in August that his Administration would cancel up to $10,000 in student debt for borrowers earning up to $125,000 and $20,000 in student loans for borrowers who used Pell grants to attend college. Almost immediately, opponents of the plan began strategizing legal challenges.

The suit filed Thursday by Nebraska, Missouri, Arkansas, Iowa, Kansas and South Carolina, argues that the Biden Administration doesn't have the legal authority to cancel student debt and that the states will be harmed if officials are able to move forward with discharging the loans. It's one of multiple filed in a week over the debt relief plan, including a separate suit filed by Arizona's attorney general .

"This is a much more credible lawsuit than anything we've seen so far," Luke Herrine, an assistant professor of law at the University of Alabama, said of the suit filed by the coalition of six states. Nonetheless, "I still think they have all kinds of issues," he added.

The major hurdle the states -- or any challenger -- has to overcome to keep the lawsuit moving forward is establishing standing, or the right to sue, by proving student-loan cancellation will cause the parties harm. The state AGs offered multiple reasons why their participation in the lawsuit is justified, but perhaps the most relevant claims to standing are related to the ways that entities linked to state governments, which both service and hold federal student loans, could be harmed by the debt relief.

Some of these concerns are vestiges of the bank-based loan program, when students borrowed from lenders to attend college and the government guaranteed that money. In 2010, the government stopped making new loans under this system, known as the Federal Family Education Loan Program, and instead only made loans directly to students going forward.

Before that, during the financial crisis, the government bought up some FFEL loans in an effort to help capitalize lenders and keep student loan money flowing. But the feds didn't buy all of those loans. The result is that now there are three different types of federal student loan debt: Loans made directly by the government to students, or Direct Loans; loans originally made by other lenders and backed by the government, but now owned by the feds; and loans from the FFEL program still owned by other lenders. The last category of debt is known as commercially-held FFEL loans.

Borrowers with FFEL loans have historically been blocked from many federal student loan benefits, including the payment pause. But up until Thursday, the Department of Education had said borrowers with commercially-held FFEL loans could access the broad-based debt cancellation if they consolidated their loans into ones held by the Department of Education.

The sue-me state

Much of the complaint filed Thursday by the state attorneys general is focused around alleged harm that borrowers' decision to consolidate could cause to a state-related entity, the Missouri Higher Education Loan Authority, or MOHELA. The attorneys general filed the suit in federal court in Missouri. They claim that allowing borrowers to consolidate the loans owned by MOHELA "harms the entity by depriving it of the ongoing interest payments that those loans generate."

The loan holders get paid off when borrowers consolidate, but "they incur what's called prepayment risk," Herrine said. "They're expecting a stream of payments over time and they can borrow against that stream and the timing of payments matters."

But the argument that MOHELA would be hurt by borrowers' decision to consolidate their MOHELA-owned loans into ones that qualify for debt relief no longer seems plausible, Herrine said. That's because the Department of Education changed the eligibility rules for the one-time debt cancellation Thursday. Going forward, borrowers with commercially-held FFEL loans, like those owned by MOHELA, won't be able to consolidate their loans to access the relief.

Getting rid of that option, which will impact an estimated 770,000 borrowers, will allow the Biden administration to "provide relief to as many eligible borrowers as quickly and easily as possible," while still exploring "additional legally-available" routes to providing borrowers with commercially-held FFEL loans relief, a Department of Education spokesperson said.

That decision, "is possibly an effort to eliminate certain types of harm that in turn could be the basis for a legal challenge," said David Rubenstein, a professor at Washburn University school of law. But it likely won't eliminate all of the alleged harm, Rubenstein said.

For the purposes of standing the harm doesn't have to be large, Rubenstein said. Instead, what matters is "actual or imminent harm, not the size of the alleged harm."

Indeed, Herrine said he believes the most plausible of the legal arguments the attorneys general have laid out to establish standing is the claim that as a servicer in the Direct Loan program MOHELA will incur costs to comply with the debt relief. "There, I think it's not an open and shut case," he said.

If a plaintiff is able to establish standing and the case begins moving through the courts that could pose a threat to the debt cancellation program overall. "That's the reason that the Department of Education is depriving all of these borrowers of relief," Herrine said of the decision to eliminate the consolidation option. "It's trying to preserve the cancellation for the other borrowers. Their chances are better on the standing question than the merits question."

When officials announced the debt relief plan, they released two legal memos arguing that the HEROES Act gives the Secretary of Education the authority for broad-based debt cancellation. The law, signed in 2003, allows the Secretary to provide debt relief to borrowers affected by a natural disaster or national emergency and to ensure they're not put in a worse position financially by that event. When the Trump Administration first started the COVID-era pause on student loan interest, interest and collections, officials invoked the HEROES Act authority to do so.

Still, the lawsuit filed Thursday argues that the Department is using an overly broad interpretation of the HEROES Act to legally justify the plan. "It is inconceivable, when it passed the HEROES Act,that Congress thought it was authorizing anything like the Administration's across-the-board debt cancellation," the attorneys general wrote in the complaint.

Influential courts are likely to be sympathetic to that argument because they've indicated they're skeptical of providing executive agencies with broad authority, Herrine said. That view could mean that if any legal challenge to debt relief is able to establish standing the program would be knocked down, Herrine said. "The people who determine that question are ideologically opposed to it," he said.

In their suit, the attorneys general rely on at least two legal theories to argue that the Biden administration's interpretation of its authority is overly broad. The first is related to the recent Supreme Court decision in West Virginia vs. EPA -- which the complaint cites, --in which the court found that when agencies take action with significant political or economic implications, they're overreaching unless it's obvious that Congress intended for the executive branch to have that authority. That threshold is known as the major questions doctrine.

If the court determines that at least one plaintiff has standing then the major questions doctrine "will likely take center stage in the litigation and perhaps its resolution," Rubenstein said.

The attorneys general also argue that the Biden administration's decision is "arbitrary and capricious," or that the reasons officials are pursuing the debt relief aren't related to their legal authority in the HEROES Act, but are instead political and pretextual, Rubenstein said. The government's lawyers would still have to prove that their reasons for pursuing the cancellation are valid even if a court decides that debt relief isn't a major question and therefore the Biden Administration has the authority to undertake it, he said.

'Borrowers could get stuck in a holding pattern'

But before the court rules formally on the key legal questions, the litigation could play a role in delaying the debt relief. The states are seeking to block the roll out of the Administration's plan while the court decides on the case. That would require something called injunctive relief and in order for a judge to grant it they would have to find that there's at least a likelihood the plaintiffs could win the case.

To pause the debt cancellation process, the court would also have to determine that it would cause "irreparable harm" to the states, that could be a challenging hurdle for them to overcome, given that if the states ultimately win the lawsuit, they could be compensated financially so the harm likely wouldn't be irreparable, both Herrine and Rubenstein said.

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