Student loan borrowers stage a rally Aug. 25, 2022, in front of The White House to celebrate President Biden’s plan to cancel student debt and to begin the fight to cancel any remaining debt. (Paul Morigi/Getty Images for We the 45m)
A public interest lawyer in Indiana is suing to block President Joe Biden’s student loan forgiveness plan on the basis that he would be forced to pay state taxes on the canceled debt.
It’s one of the first significant legal challenges to Biden’s plan.
The federal lawsuit was filed Tuesday in the U.S. District Court for the Southern District of Indiana by Frank Garrison, who lives in the state. He works for the Pacific Legal Foundation, a nonprofit conservative law firm in California. Attorneys at the nonprofit are representing Garrison in the lawsuit.
Garrison alleges in court documents that the president’s new forgiveness policy is an abuse of executive power.
“Nothing about loan cancellation is lawful or appropriate,” the lawsuit says. “In an end-run around Congress, the (Biden) administration threatens to enact a profound and transformational policy that will have untold economic impacts. The administration’s lawless action should be stopped immediately.”
The challenge asks the court to prevent the government from enacting student loan cancellation under Biden’s plan.
The lawsuit names the U.S. Department of Education and U.S. Secretary of Education Miguel Cardona as defendants. It challenges the agency’s “unacceptable abuse of executive authority to restore the rule of law and to enforce the Constitution’s separation of powers,” according to a press release from the Pacific Legal Foundation.
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Garrison argues in the lawsuit that he will qualify for $20,000 in student loan forgiveness under Biden’s new plan.
He said he is already pursuing federal student debt relief through the Public Service Loan Forgiveness Program (PSLF), which erases the debt of public servants after 10 years of payments and service. Participants in that program do not have to pay federal or state taxes.
He expects the government to cancel his remaining balance in a little more than four years, according to the lawsuit.
But because the Hoosier state is set to be one of a handful of states in the country to tax debt canceled under Biden’s plan, Garrison says he will face a state tax liability of more than $1,000 for 2022. Arkansas could be one of those states, but state finance authorities say they won’t make a decision until next year.
“Frank will be stuck with a tax bill that makes him financially worse off than continuing with his repayment program under PSLF,” the Pacific Legal Foundation said in a statement Tuesday. “He did not ask for cancellation, doesn’t want it, and has no way to opt out of it.”
When asked about the lawsuit at Tuesday’s White House briefing, press secretary Karine Jean-Pierre said that anyone who doesn’t want student debt relief will be able to opt out.
“Opponents of the Biden-Harris administration student loan plan are trying to stop it because they know it will provide much-needed relief for working families,” she said.
Hoosiers stand to benefit
More than 850,000 Hoosiers could see at least some of their federal student loan debt forgiven through President Joe Biden’s student loan forgiveness program.
The White House estimates that roughly 856,400 Hoosiers are eligible to have at least $10,000 in student loan debt canceled. Most of those recipients – about 555,500 – could have up to $20,000 forgiven because they received Pell Grants, which are provided to students whose families can’t help them pay for college.
The Biden administration’s student loan forgiveness initiative that was announced last month applies to borrowers with incomes less than $125,000 and from households earning $250,000 or less.
In Indiana, any discharged debt will not be counted as income for federal tax purposes, but the Indiana Department of Revenue said the state will include the debt forgiveness when calculating state and local income taxes.
State lawmakers approved Indiana’s most recent tax code last year but chose to remove the federal exemption on taxing canceled student loan debt. The General Assembly is expected to address the topic in the upcoming legislative session in January.
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