GOP states lawsuit threatens Biden’s student loan plan. Here’s why.
A coalition of six Republican-led states — Arkansas, Iowa, Kansas, Missouri, Nebraska and South Carolina — sued the Biden administration in September over the debt relief policy. They accuse the president of overstepping his authority and threatening the revenues of state entities that profit from federal student loans.
The Biden administration has insisted it has the legal authority to cancel student debt.
A significant issue in the lawsuit is a subset of loans under the Federal Family Education Loan (FFEL) program, in which private lenders incurred federally guaranteed debt. Before the program ended in 2010, the portfolio was split between the Department of Education and a handful of companies.
These private loans are routinely excluded from loan forgiveness initiatives, but borrowers can often consolidate them into a federal direct loan to qualify. After Biden unveiled his relief plan, there was a spike in consolidations among FFEL commercial borrowers trying to cash in on the policy.
The states said the activity posed a financial threat.
Missouri Attorney General Eric Schmitt (right) said the Missouri Higher Education Loan Authority, a quasi-state organization that owns and maintains FFEL debt, would be deprived of continued interest payments if borrowers consolidated en masse. He says the company would also lose revenue from servicing direct loans — those made and held by the federal government — which are wiped out.
Widespread consolidations would also mean Nebraska, which invests in securities backed by private federal student loans, could lose interest income generated by the securities, Nebraska Attorney General Doug Peterson (R) claims. in the complaint. He said Biden’s plan could cut that market in half.
The Biden administration reduced eligibility for the debt relief program hours before the case was filed. The Department for Education said FFEL commercial borrowers could no longer consolidate to qualify for the one-time relief.
Biden administration restricts eligibility for student debt cancellation
The decision will exclude about 770,000 people from the program, according to an administration official. About 1.5 million other borrowers who have both FFEL commercial loans and direct loans could also benefit from less debt relief.
The coalition of states said in a Tuesday court filing he could pursue an order requiring borrowers who applied for consolidation before the deadline to pay the former owner of their loans for lost interest.
The Biden administration said in a recent filing in court that preventing further bindings rendered state injury and position arguments ineffective. Lawyers for the Department of Justice also said that FFEL commercial loans are basically an “uncertain source of income” because there is no guarantee of repayment.
Most of the states involved in the lawsuit say they will lose tax revenue because of Biden’s policies. They take a cue from the federal government, which won’t consider discharged student debt as taxable income until January 2026. The Biden administration argues that any losses are the result of states’ own decisions about how to tax loan discharges. federal authorities, not the discharge policy itself. .
The Biden Loan Relief Plan will forgive up to $10,000 in federal student debt for borrowers earning up to $125,000 a year, or up to $250,000 for married couples. Borrowers who have received Pell Grants are eligible for an additional $10,000 rebate.
In defending the new loan forgiveness plan, the Biden administration cited a 2003 law giving the executive broad power to revise student loan programs. Attorneys for the Justice Department said in a recent court filing that the policy “fits comfortably into the [Education] Authority of the Secretary’s HEROES Act “based on “thorough and focused economic analysis in response to the national COVID-19 emergency”.
The six states and other conservative groups argue that Biden’s policy represents an illegal overreach of the executive branch, as the 2003 law was created to give the president authority after a disaster such as the 9/11 terrorist attacks 2001. They say there is nothing in the law that explicitly authorizes radical debt cancellation. The states also claim that the executive branch does not have the power to create a new pardon policy and usurps the power of Congress to legislate.
Courts have dismissed two lawsuits for lack of standing, including one brought by conservative law firm Wisconsin Institute for Law and Liberty and another by the Pacific Legal Foundation. Both plaintiffs appealed or filed amended complaints.
White House applies for student loan forgiveness
Amid legal challenges, the administration delayed issuing an application for the pardon program. About 8 million people, whose income information is already registered with the Ministry of Education, could have their loans automatically cancelled. The Biden administration has said borrowers can opt out of the program.