Legal Update

LEGAL UPDATE By: Ibrahim M. Berro

Judicial Law Clerk United States District Court for the Eastern District of Tennessee

ASKING PERMISSION FOR FORGIVENESS: LEGAL CHALLENGES TO THE STUDENT LOAN FORGIVENESS PLAN

On August 24, 2022, President Biden delivered on a campaign promise to cancel at least $10,000 of student debt for all federal loan borrowers by announcing the Student Loan Forgiveness Plan.1 Under the three-part Plan, borrowers earning less than $125,000 and married couples earning less than $250,000 receive up to $10,000 in debt cancellation (and up to $20,000 for Pell Grant recipients).2 The Plan also extends the student loan repayment freeze though December 31, 2022, and proposes loan repayment rule changes that cap undergraduate loan repayments at 5% of a borrowers’ discretionary income; raises the nondiscretionary income threshold; shortens the loan forgiveness period; and subsidizes interest on borrowers’ loan balances.

Before the Plan was revealed, even allies questioned the Biden Administration’s authority to cancel student loans.3 But as the saying goes, it’s easier to ask forgiveness than permission—or is it? A flurry of lawsuits ensued and now the $400 billion Plan’s fate is in the hands of the courts.4 This article provides a basic overview of the statutory basis for the Plan and highlights two pending lawsuits seeking to vacate it.

The Statutory Basis for the Student Loan Forgiveness Plan

If Congress controls the nation’s purse, how can the Executive unilaterally forgive $400 billion in student loans? According to the Biden Administration, the answer is the Higher Education Relief Opportunities for Students Act of 2003 (the “HEROES Act”).5 Enacted in the wake of 9/11 and at the outset of the wars in Afghanistan and Iraq, the HEROES Act authorizes the Secretary of Education to “waive or modify any statutory or regulatory provision applicable to” federal student loan programs “the Secretary deems necessary in connection with a war or other military operation or national emergency.”

The Department of Education, in a memorandum accompanying the Plan’s announcement (the “Cardona memorandum”), cites the HEROES Act’s broad authority to “waive or modify” as the Secretary “deems necessary” to include the power to reduce or cancel principal student loan balances and provide for cancellation on a categorical or class-wide basis, rather than a case-by-case basis.6 Notably, the Cardona memorandum’s conclusions contradict a Trump Administration memorandum analyzing and limiting the Secretary’s unilateral authority to cancel loans under the Act (the “DeVos memorandum”).7

Legal Challenges to the Student Loan Forgiveness Plan

Two of the many legal challenges to the Plan8 are particularly noteworthy—Nebraska v. Biden, where the Supreme Court granted certiorari to review the Eight Circuit’s nation-wide injunction of the Plan, and Brown v. U.S. Department of Education, where a district court in Texas has vacated the Plan.9 Nebraska v. Biden

Nebraska involves six states’ attempt to enjoin the Plan—Nebraska, Missouri, Arkansas, Iowa, Kansas, and South Carolina. Missouri asserts that MOHELA, a quasi-state entity that services student loans, will lose interest revenue because the Plan encourages borrowers to consolidate their FFELP loans (forgiveness ineligible loans) into DLP loans (forgiveness eligible loans). Arkansas on behalf of ASLA, the state’s authority that services FFELP loans, and Nebraska on behalf of a state investment fund that invests in FFELP loans, assert similar financial harm. The remaining states, which have adopted the federal definition of taxable income under which federal student loan discharges are not taxable until January 1, 2026, contend that the Plan would result in future lost tax revenues.

The Eastern District of Missouri dismissed the States’ claims for lack of standing, holding that Missouri lacked standing because of the financial separation between the state and MOHELA and that Arkansas and Nebraska failed to articulate ongoing injuries because loans consolidated after September 29, 2022, are not eligible for loan forgiveness. The court further held that the States’ alleged injuries from future lost tax revenues were speculative.

The Eight Circuit reversed. Focusing on Missouri, it held that MOHELA is an arm of the state because of its state-appointed board and its financial obligations to the State, and that even if MOHELA was not an arm of the state, Missouri has a significant financial interest in the entity’s financial discharges. The court then enjoined the Plan based on the substantial irreversible impact it would have on the States.

On December 1, 2022, the Supreme Court declined to lift the injunction but set the case for expedited briefing with oral argument in February 2023.10 Brown v. U.S. Department of Education

Brown, in the Northern District of Texas, is the only challenge to the Plan to reach a ruling on the merits. The plaintiffs, two student loan borrowers—one ineligible for forgiveness because her loans are commercially held and the second ineligible for the $20,000 maximum forgiveness because he had not received a Pell Grant—asserted that the Plan procedurally and substantively violates the Administrative Procedures Act (“APA”).

The plaintiffs contended that the HEROES Act’s exception from the APA’s notice-and-comment requirement only applies where the Secretary takes a statutorily authorized action. Because loan cancellation is not authorized by the statute and the Plan was not subjected to notice and comment, the APA was procedurally violated. The district court rejected this argument.

The plaintiffs next argued that the Plan’s vast economic and political significance implicate the major-questions doctrine, which requires clear Congressional authorization for agency action. The district court agreed based on findings that that the Plan’s $400 billion price tag satisfied the doctrine’s economic prong and Congress’ multiple failed attempts to pass loan forgiveness satisfied the political prong.

The court then found that the HEROES Act lacked clear Congressional authorization. First, the Act does not mention loan forgiveness. Second, the COVID-19 pandemic, which President Biden declared as “over” prior to the Plan’s establishment, likely does not constitute a national emergency sufficient to empower the Secretary to act under the statute. Third, citing the Devos memorandum, it found that past agency interpretations of the statute do not confer categorical cancellation authority. Accordingly, the district court held that the Secretary exceeded his power under the Act and vacated the Plan. The continued on page 26