A change to federal student loan forgiveness guidelines seemingly counters the lawsuit filed by six Republican-led states — at a big cost for some four million borrowers.
- Two of the states argue they will lose revenue because they service FFEL program student loans.
- The other four states say they will be harmed by canceled debt because it will not be considered taxable income.
- The lawsuit asks that the court institute an immediate injunction to stop debt cancellation before it goes into effect in October.
The same day that attorneys general from six Republican-led states filed a lawsuit challenging President Joe Biden’s student loan debt forgiveness plan, the Department of Education quietly made moves that may quash their legal claims.
Arkansas, Iowa, Kansas, Missouri, Nebraska, and South Carolina on Thursday filed a joint federal lawsuit against the president and the Department of Education (ED) in the Eastern District of Missouri.
A central claim of the lawsuit is that the president’s plan to wipe out wide swaths of student debt will cost these states revenue from servicing loans and taxes. It also claims that ED doesn’t have the authority to carry out Biden’s plan.
“The Biden Administration’s executive action to cancel student loan debt was not only unconstitutional, it will unfairly burden working class families and those who chose not to take out loans or have paid them off with even more economic woes,” Missouri Attorney General Eric Schmitt said in a statement. Schmitt is a Republican candidate for his state’s open U.S. Senate seat.
But even as the lawsuit was announced, ED seemingly countered the plaintiffs’ central argument by changing guidelines addressing the Federal Family Education Loans (FFEL) program. NPR reported Thursday that the department quietly changed the guidance on its website to state:
“As of Sept. 29, 2022, borrowers with federal student loans not held by ED cannot obtain one-time debt relief by consolidating those loans into Direct Loans.”
The move may counter Republicans’ lawsuit, but it would also likely put student loan debt forgiveness out of reach for approximately 4 million borrowers with commercially held FFEL loans, depending on how many consolidated before the new deadline.
Republicans Challenge Debt Forgiveness Plan
Legal challenges to Biden’s student debt cancellation plan have been expected, but experts wondered whether those suits would be able to prove that debt cancellation harms them.
The conservative Pacific Legal Foundation (PLF) filed a suit against ED on Tuesday alleging that debt cancellation would harm borrowers in line for forgiveness through other government programs. However, a clarification by the administration allowing borrowers to opt out of debt forgiveness put the lawsuit’s claims on thin ice.
This suit filed by six red states represents a significant escalation by Republicans who oppose Biden’s debt-forgiveness plan. Conservatives were further outraged this week by Congressional Budget Office estimates that debt forgiveness could cost more than $400 billion over 10 years.
In the lawsuit, Missouri and Arkansas argue that debt forgiveness will directly affect their own coffers.
The Higher Education Loan Authority of the State of Missouri (MOHELA) and the Arkansas Student Loan Authority (ASLA) are both servicers for the FFEL program. As such, they collect revenue by charging interest on these loans.
ED’s pre-Sept. 29 guidance stated that to qualify for forgiveness, FFEL borrowers should consolidate privately held loans into the Direct Loan program. Such consolidation would remove these loans from MOHELA and ASLA oversight, hurting their respective states’ finances, according to the lawsuit.
According to the lawsuit, Arkansas officials estimate that up to $6 million in FFEL loans previously serviced by ASLA had been consolidated into the Direct Loan Program since Aug. 24.
Iowa, Kansas, Nebraska, and South Carolina, meanwhile claim they will be financially harmed by debt cancellation because they would not be able to tax canceled debt as income. Furthermore, some states have investments in student loan asset-backed securities (SLABS), which will decrease in value with the consolidation of FFEL loans, the suit alleges.
The plaintiffs asked that the judge institute an immediate injunction to stop the plan from going into effect. The lawsuit says the injunction is required because, beyond the financial harm each state would incur, Biden and ED don’t have the legal authority to carry out this program through the Higher Education Relief Opportunities for Students (HEROS) Act.
Course Reversal Could Preempt Republican Claims
A quiet change in guidance pertaining to FFEL forgiveness may have nullified the central claim in Republicans’ lawsuit the same day it was filed.
The department’s primary online guide to Biden’s debt cancellation plan previously stated that FFEL borrowers would be able to consolidate into the Direct Loan program to have their debt canceled. However, a mid-day Thursday change indicates that will no longer be the case.
ED’s website now states that those who applied for consolidation before Sept. 29 will be eligible for cancellation.
A department spokesperson told BestColleges that ED is exploring other options to provide relief to borrowers with privately owned FFEL and Perkins loans.
“Our goal is to provide relief to as many eligible borrowers as quickly and easily as possible, and this will allow us to achieve that goal while we continue to explore additional legally-available options to provide relief to borrowers with privately owned FFEL loans and Perkins loans, including whether FFEL borrowers could receive one-time debt relief without needing to consolidate,” the spokesperson said.
Approximately 4 million borrowers have FFEL loans held by private companies, while the remaining 4 million FFEL loans are already held by the federal government.