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President Joe Biden speaks during the White House Conference on Hunger, Nutrition, and Health, at … [+]
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Republicans have vowed to block President Biden’s new student loan forgiveness plan in court. And a new lawsuit filed by a conservative legal organization seeks to do just that. But will it succeed?
Here’s what student loan borrowers need to know.
Biden’s Student Loan Forgiveness Initiative May Wipe Out Up to $20,000 In Student Debt
Under Biden’s one-time student loan forgiveness plan announced last month, borrowers with federal student loans held by the government can receive up to $20,000 in federal student loan forgiveness if they were awarded a Pell Grant; otherwise, they may be eligible for up to $10,000 in loan forgiveness. Pell Grants are a form of federal financial aid given to lower-income families that does not have to be repaid.
Borrowers are eligible for Biden’s student loan forgiveness plan if they earned less than $125,000 (or less than $250,000 if they are married) in either 2020 or 2021. An application will be made available in October, and borrowers will have until December 2023 to apply. The Education Department may be able to provide some borrowers with relief automatically if they already have recent income information on file.
New Lawsuit Seeks to Block Biden’s Student Loan Forgiveness
A lawsuit filed this week by the Pacific Legal Foundation seeks to block Biden’s student loan forgiveness plan. The Plaintiff named in the suit, who says he is an Indiana resident, argues that he is on track to get his full balance forgiven, tax-free, through Public Service Loan Forgiveness, and has no need for the $20,000 in student loan forgiveness through Biden’s plan. Indiana is one of a handful of states that may tax the student loan forgiveness award, which could result in an unexpected tax bill for the borrower. The lawsuit seeks to stop Biden’s student loan forgiveness plan from going into effect.
“Congress did not authorize the executive branch to unilaterally cancel student debt,” said a spokesperson at Pacific Legal Foundation in a statement. “It’s flagrantly illegal for the executive branch to create a $500 billion program by press release, and without statutory authority or even the basic notice and comment procedure for new regulations.”
Some Republican lawmakers praised the new lawsuit. “The Biden administration’s student loan bailout should be squashed by the heel of the law,” said Rep. Virginia Foxx (R-NC) in a statement. “Millions of hardworking taxpayers will be forced to shoulder the financial burden of this scheme if it is not stopped.”
Proving Standing Might be Difficult In Student Loan Forgiveness Suit
While a lawsuit has been filed, a victory for the Plaintiff is not a foregone conclusion. For the lawsuit to even proceed, a Plaintiff must be able to show that they have “standing,” which means they must sufficiently establish a connection between the challenged policy and actual, cognizable harm.
Proving harm in this particular suit may be challenging for this Plaintiff. The harm alleged in the suit appears to stem largely from state tax liability that would result from loan forgiveness under Biden’s plan, particularly in light of the fact that the Plaintiff argues that he would be entitled to complete, tax-free loan forgiveness at a later date through the Public Service Loan Forgiveness program.
But this assertion may be speculative. No loan forgiveness has been awarded yet (the Education Department has not rolled out the initiative, although an application will be made available in the coming weeks). No one has incurred any state tax liability associated with loan forgiveness yet. And in the relatively small number of states that currently may treat Biden’s loan forgiveness plan as taxable, state lawmakers could at some point amend the state tax code to exclude the event from taxation, as many states did for the Paycheck Protection Program in 2020 and 2021. Depending on the borrower’s circumstances and state law, the state tax code may also provide exemptions that could reduce or even eliminate any resulting tax liability.
Furthermore, the Biden administration has confirmed that no one will be “forced” to receive student loan forgiveness under the initiative. A White House spokesperson said that even if some of the relief will be provided automatically, borrowers will have the option to opt out. If that’s the case, the Biden administration’s argument will simply be that the borrower can elect not to receive the loan forgiveness award. If there is no loan forgiveness award, then there is no state taxation, and thus, no specific harm.
Lawsuit Creates Uncertainty for Borrowers Seeking Student Loan Forgiveness
Still, legal proceedings can be unpredictable as a general rule. And Biden’s sweeping student loan forgiveness plan is unprecedented.
Many legal experts argue that the plan — premised on emergency authority under the HEROES Act of 2003 — is sound. The HEROES Act provides fairly broad authority to the federal government to modify federal student loan programs during national emergencies, including by cancelling federal student loan debt.
One potential risk for borrowers is that a federal court could issue an injunction, which would freeze the Education Department’s efforts to implement the student loan forgiveness plan while the legal proceedings play out. This could leave millions of federal student loan borrowers in limbo, unsure of when — or whether — they would receive the relief.
The situation could get even more complicated if a court issues an injunction after the administration has already begun rolling out the student loan forgiveness benefits, as this could result in multiple categories of borrowers, from those who already received loan forgiveness, to those whose applications are processing, and those who have yet to apply.
Advocates are concerned that the mere existence of litigation designed to block the plan could create enough uncertainty that some borrowers may not even bother applying for relief.
But for now, the Biden administration is moving forward in implementing the initiative, and an application will go live in early October, according to Education Department officials.
Further Student Loan Reading
Biden’s Student Loan Forgiveness Could Be Taxable In Some States
What To Expect When You Apply For Student Loan Forgiveness Under Two Big Biden Initiatives
Student Loan Borrowers Should Write Down These Critical Dates For Loan Forgiveness And Repayment
Millions Of Student Loan Borrowers Will Get Refunds Of Payments Under Biden’s Loan Forgiveness Initiative