WASHINGTON — The Biden administration's student loan forgiveness initiative is poised to face an array of legal challenges that could freeze the plan before it gets up and running, threatening a policy that has stirred fierce bipartisan debate and infighting among Democrats.
The plan announced by the White House last week would wipe out significant amounts of debt for millions of Americans. Those earning less than $125,000 per year would have $10,000 in debt erased, and those who received Pell grants would get $20,000 in debt relief.
While it fulfills one of President Joe Biden's campaign promises to help graduates who have fallen behind in their payments, the plan carries a significant cost — projected to be between $300 billion and $500 billion — to the federal government, which will not receive repayments that it is currently owed.
Enacting such a major fiscal outlay through emergency executive powers has raised questions about whether Biden has the authority to carry out such a policy on his own, and many expect lawsuits and a protracted legal battle, including by those who stand to lose financially from the plan. Those who might try to claim such damages could include loan servicers who are missing out on processing fees or lawmakers who view the policy as an infringement on congressional budgetary authority.
Financial services trade groups, scholars and think tank experts have spent the past several days trying to determine if the White House initiative is on sound legal footing or if it could be ripe for court challenges.
Some critics have compared Biden's move to similar executive actions undertaken by former President Donald Trump, including his use of emergency powers to fund a border wall in 2019. Although that was different from canceling federal debt, opponents of the decision argued that Trump was abusing his authority by transferring Pentagon funds to pay for wall construction without congressional approval. The Supreme Court allowed the construction to go forward while the case worked its way through lower courts, but Biden halted work on the barrier upon taking office.
Because of the expectation of a legal fight, some have warned that borrowers expecting forgiveness should not yet get their hopes too high.
Previous efforts by the Biden administration to forgive debts have already run into legal obstacles. A $4 billion debt relief program for "socially disadvantaged" farmers was frozen last year amid challenges, prompting Congress to ultimately rewrite the program in subsequent legislation that passed last month.
One of the main questions revolving around the student loan program is who — if anyone — has the legal "standing" to claim that they have been harmed by the policy and are entitled to file a lawsuit. The most likely outcome, legal experts say, is that banks or loan servicers who stand to lose money from fees that they would have been scheduled to collect file suits. Since many borrowers would owe less money overall, the amount that they pay each month to companies that manage loan payments would also shrink.
"Everything is subject to litigation, so I'm sure there will be some swings at this," said Jayne Conroy, a plaintiff's attorney at the law firm Simmons Hanly Conroy.
Conroy said that loan servicers could have contracts with commitments about the longevity of loans that could be breached by the debt cancellation. Some servicers, she suggested, could claim that their competitors benefited from the Biden administration's policy.
Banks have so far said little about the policy as they await additional details from the Department of Education about how the loan forgiveness will work. But an official from one financial services industry group, who asked to remain anonymous while discussing internal deliberations, said private lenders were monitoring the implementation of the debt relief with their legal teams to determine if lawsuits are the appropriate course of action.
Republican-led states could also try to intervene, although it is less clear what basis they would have to object. Some attorneys general have warned that they are planning a legal challenge.
"I am ready to join with other attorneys general, or if I have to go alone, to take action against President Biden's latest executive order in regard to student loan debt," Leslie Rutledge, the attorney general of Arkansas, told the Fox Business Network.
If Republicans retake the House of Representatives next year, they could also try to sue to block the program. Rep. Kevin Brady, R-Texas, the top Republican of the Ways and Means Committee, said this week that he believed Biden's move was illegal.
"I don't think it passes muster, but I worry the money will be substantially out the door," Brady told CNBC. "I don't know how any president gets a half a trillion dollars just by signing his signature on an executive order."
The Biden administration issued a memo from the Department of Justice's office of legal counsel that said the student loan debt could be canceled under the authority of the Higher Education Relief Opportunities for Students Act of 2003. That law grants the education secretary the power to "alleviate hardship" that federal student loan borrowers are experiencing because of a national emergency, such as the pandemic. It has also been invoked to permit the Education Department to suspend student loan repayments since 2020, an action that Biden administration officials point out has not faced legal challenges.
But some legal scholars warn that basing a broad cancellation of student debt on the pandemic could be a stretch, leaving open the possibility that courts could strike down the policy.
Jed Shugerman, a professor at Fordham Law School, said he was concerned that the Biden administration's lawyers were "sloppy" in using the 2003 law as a basis for such sweeping debt forgiveness. He predicted that the policy would be frozen.
"My guess is that one of these private banks will go to a federal district court with a favorable judge, and there will be a nationwide injunction that stops this program from going into effect," Shugerman said.
Shugerman added that, although he believes the ambition of the policy is admirable, it is hypocritical of Democrats to invoke emergency powers to enact policy similar to those the Trump administration used for actions on immigration.
"If Democrats were outraged by the Trump administration's abuse of emergency powers, why are they tolerating it as a matter of principle?" he said.
Biden administration initiatives have faced difficulty in the courts over the past year.
A $4 billion debt relief program for "socially disadvantaged" farmers was frozen last year amid legal challenges and was ultimately rewritten in the so-called Inflation Reduction Act that Congress passed last month.
Requirements in the American Rescue Plan that Congress passed last year that prohibited states from using relief money to subsidize tax cuts faced lawsuits from states and courts, blocking the Biden administration from enforcing that provision of the law.
And the Supreme Court last year ended the Biden administration's eviction moratorium, ruling that it was improperly relying on an old statute to give the Centers for Disease Control and Prevention more power than Congress intended.
Biden himself has previously expressed reservations about how far he could go to wipe out student debt unilaterally.
During an event hosted by CNN last year, he said that he did think he could write off $10,000 of debt but that $50,000 would be going too far.
"I don't think I have the authority to do it by signing the pen," Biden said.
A White House spokesperson, Abdullah Hasan, said any effort by Republicans to try to halt student debt forgiveness would hurt the middle class.
"Let's be clear about what they would be trying to do here: The same folks who voted for a $2 trillion tax giveaway for the rich and had hundreds of thousands of dollars of their own small-business loan debt forgiven would be trying to keep millions of working middle-class Americans in mountains of debt," Hasan said.
At a briefing last week, Bharat Ramamurti, a deputy director of the White House's National Economic Council, said he believed that the Biden administration was on "very strong legal ground."
"Of course, people can challenge actions in court," Ramamurti said. "It's going to be up to the courts to decide whether those are valid claims or not."
