States sue over Biden's student-loan repayment program using arguments that succeeded before

By Jillian Berman

The suit, which is being led by Missouri, rests in part on the state's connection to MOHELA, a student-loan servicer

Missouri is leading six other states in asking a court to block the Biden administration's revamped student-loan repayment program, less than a year after the state was a key participant in the lawsuit that ultimately invalidated President Joe Biden's mass student-debt forgiveness plan.

The suit filed Tuesday in federal court in Missouri is challenging the Saving on a Valuable Education plan, known as SAVE, a program launched last year and aimed at helping borrowers lower their student-loan payments. SAVE relies on a different legal authority than Biden's plan to cancel up to $20,000 in student debt for more than 40 million borrowers, which the Supreme Court knocked down last year.

In the complaint, Missouri and the other states rely on some of the same arguments that found a sympathetic ear with the court's six conservative justices. In particular, Missouri's attorney general is arguing that the state's relationship to MOHELA, a student-loan servicer created by the state legislature, is enough to provide Missouri with standing, or the right to sue over a policy because a party is directly harmed by it.

The suit comes one day after the Biden administration announced more details about its latest effort at mass student-debt forgiveness. It's too early for opponents to be able to sue over that policy. But the case over the SAVE program highlights the ways opponents of student-debt relief efforts, including the latest forgiveness initiative, will use the courts to challenge them. Already, Biden is facing another lawsuit over SAVE from 11 Republican-led states.

The Department of Education didn't immediately respond to a request for comment on the suit filed Tuesday, but the agency has previously said that Congress gave the department the authority to define the terms of income-driven repayment plans in 1993.

Latest version of income-driven repayment

SAVE is the latest version of the income-driven repayment program, which was created by Congress in the early 1990s and allows borrowers to repay their debt as a percentage of their income and then have the remainder canceled after a certain number of years in repayment.

The plans were originally launched as a kind of insurance for periods of bad luck. Over the years, Congress and the executive branch have tweaked the plans, largely to make them more generous to borrowers. In recent years, as income-driven repayment has become more widely used, the programs have become targets for critics who worry about the cost of the student-loan program to taxpayers.

With SAVE, the Biden administration aimed to create a plan that was broadly appealing to borrowers, particularly those who are struggling to fit their payments in with other expenses. One of the major differences between SAVE and other income-driven repayment plans is that under SAVE, the government covers any unpaid interest. Previously, a major complaint from borrowers using income-driven repayment was that their monthly payments weren't enough to cover their interest, so borrowers would see their balances grow even when they were making payments.

In addition, SAVE allows for a shorter forgiveness timeline for some borrowers. Under previous versions of income-driven repayment, borrowers could only have their debt canceled after at least 20 years of payments. With SAVE, borrowers who took out $12,000 or less can have their debt canceled after 10 years of payments. Already, the Biden administration has wiped out $1.2 billion in student debt for 153,000 borrowers through this provision.

Last year, an attorney at the Defense of Freedom Institute, a conservative organization that has challenged other Biden administration regulations, said that challenging SAVE in the courts could be more difficult than challenging the mass debt-relief plan.

"When you look at this statute giving the authorization to the Department of Education to formulate these rules," Paul Zimmerman, policy counsel at DFI, said last year at a Heritage Foundation event, "it's very broad. It's very broad authority that gives the secretary the power to craft income-contingent repayment plans with the only real guardrail" being that the maximum repayment period can't go over 25 years.

"Where a challenger is going to have to be successful is saying this is a difference not just in degree from other past repayment plans, this is unprecedented, this is a difference in kind and Congress never envisioned this in the early 1990s," Zimmerman said a couple of months before the Supreme Court struck down Biden's initial debt-relief plan.

'A grant program that Congress never authorized'

The case Missouri and the other states are making is that SAVE "is not a student-loan program. It is a grant program that Congress never authorized," the suit says.

For a court to get to the question of whether the Biden administration exceeded its executive authority, it will still have to find that the states have standing. In this case, Missouri and the other states are making a similar argument for standing as the one that found success at the Supreme Court.

They claim that SAVE risks taking revenue away from MOHELA, and that because of MOHELA's ties to the state, that could harm Missouri. The suit highlights two key ways MOHELA reaps revenue from the federal student-loan program. The first is through servicing loans issued by the Department of Education, which are known as Direct Loans. The suit argues that because SAVE shortens the forgiveness timeline for some borrowers, that could decrease the volume of accounts MOHELA services and therefore its revenue.

In addition, the suit notes that MOHELA owns over $1 billion worth of asset-backed securities made of Federal Family Education Loans or student loans that were made by banks but backed by the federal government under a previous iteration of the federal student-loan program. Because of SAVE's generous provisions, borrowers are incentivized to consolidate out of the FFEL program into the Direct Loan program, which offers access to SAVE, the suit argues. That reduces the value of the assets owned by MOHELA, the states say.

The Supreme Court's conservative justices agreed with the states' argument in the mass student-loan case that Missouri's connection to MOHELA was enough to confer standing to the state, despite some skepticism from legal scholars, including those who thought the mass forgiveness plan was unlawful. MOHELA was not a party to that case and it isn't a party to the SAVE litigation.

The Supreme Court case highlighted MOHELA's growing role in the student-loan system. In the SAVE lawsuit, Missouri notes that the organization now services 7.8 million student-loan accounts, up from 2.4 million in 2020. Now, amid complaints over the way the organization has handled a loan-forgiveness program for public servants and the return to repayment after the COVID-era pause, it's receiving even more scrutiny.

On Wednesday, Sen. Elizabeth Warren, a Massachusetts Democrat, is scheduled to hold a hearing focused on the organization.

MOHELA did not immediately respond to a request for comment, but it has said that it "remains focused on its primary mission of serving student borrowers."

-Jillian Berman

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04-12-24 0914ET

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