Missouri judge hears lawsuit challenging Biden student debt relief plan
Arkansas is one of six states challenging debt-forgiveness plan
Whether student debtors will get the loan relief promised by President Joe Biden is now in the hands of a Missouri federal judge.
For nearly two hours Wednesday, attorneys for the six states challenging the plan to forgive almost $500 billion in student debt argued with Department of Justice lawyers over which laws should govern the decision.
The states, including Arkansas, are arguing that the debt relief, which would impact 95% of people with outstanding student loans, harms entities that service the loans and treasuries that would benefit from taxes on forgiven debt.
At the end of the hearing in St. Louis, U.S. District Judge Henry Autrey did not make a ruling on the states’ request for a temporary restraining order to block the program. He also did not indicate when he would issue a decision.
Autrey did pepper both sides with questions during the hearing. For example, he focused on whether the states suing over the debt have a right to bring the case.
“It is hard to make a cake if you don’t have a pan to put that cake in,” Autrey said. “That pan is standing. It doesn’t matter if you have all the ingredients.”
The lawsuit was filed by attorneys general from Missouri, Nebraska, Arkansas, Iowa, Kansas and South Carolina. It names Biden, Secretary of Education Miguel Cardona and the Department of Education as defendants.
Biden on Aug. 24 announced that people still paying debt from direct federal student loans would receive forgiveness on up to $20,000 of the outstanding balances. Every borrower with an income of $125,000 or less – $250,000 for married couples – during 2020 or 2021 will have $10,000 in debt forgiven.
Borrowers who also received Pell grants while in school will have $20,000 in debt forgiven.
During the hearing, attorneys for both sides said that will eliminate about $500 million of the $1.6 billion in outstanding debt on federal student loans.
The lawsuit asserts that each of the suing states will be harmed by the action, either through lost tax revenue on forgiven debt or indirectly through lost revenue to agencies like the Missouri Higher Education Loan Authority, or MOHELA. Each of the states use the same figure for taxable income as is reported on federal forms and the student debt is not being treated like other forgiven loans, which must be reported as income for tax purposes.
MOHELA was founded in 1981 to help finance student loans issued by banks. In its early years, it sold bonds and purchased debt from banks, then used payments to retire the bonds. Through numerous changes in federal loan rules, it has become a major servicer of debt, acting as the collecting agent for loans made directly from the federal treasury.
As of June 30, MOHELA was servicing 5.2 million federal student loan accounts nationwide and servicing $168.1 billion in debt. It doubled the number of federal loans being serviced in the most recent fiscal year and added 1,000 staff and contract employees, according to its most recent annual report.
Student loan relief cuts off servicing revenue for debtors who have their entire loan forgiven, Nebraska Solicitor General James Campbell argued Wednesday.
“The money they lose from servicing these loans, there is no way to get that money back,” he said.
In its response to the lawsuit, the federal government argues agencies like MOHELA are not guaranteed any particular level of revenue from that work.
Missouri cannot sue on MOHELA’s behalf because the law establishing it allows it to sue and be sued in its own name, said Brian Netter, deputy assistant attorney general. He noted that the information about MOHELA included in the states’ lawsuit was obtained through a Sunshine Law request to the agency, not by the agency volunteering it.
“We think there are plenty of indications here that if MOHELA has an injury, that MOHELA could be a plaintiff,” Netter said.
MOHELA did not respond to an inquiry from The Independent about the lawsuit.
The possibility that the states may lose tax revenue is not enough to sustain the lawsuit, Netter added. They are free to change their definition of income.
“The states are free to choose to tax these matters however they please,” he said.
The key dispute Autrey must resolve is which law should control the decision to issue debt relief.
The Department of Education is citing the HEROES Act, a 2003 federal law giving the department power to alleviate hardship for student borrowers in a national emergency. That law allows agencies to bypass regular processes to make decisions quickly.
The states argue that the regulations for relieving debt exceed the authority granted by the HEROES Act and should instead be governed by the Administrative Procedures Act, which provides for comment periods and requires agencies to justify their decisions in light of those comments.
The HEROES Act can’t be stretched as far as the Biden administration wants, Campbell said.
“The federal government is acting in a hidden, ever changing and increasingly crumbling escapade of lawlessness,” Campbell said.
A lengthy comment period would have defeated the purpose of debt relief, Netter said. The goal, he added, is to help people before a COVID-19 pause in repayments ends Dec. 31.
The HEROES Act provides the U.S. secretary of education broad authority to act in a way that prevents economic harm as a result of that emergency, he said.
Just like emergency aid for hurricane victims isn’t limited to actions “while the hurricane is spinning,” Netter said, the debt relief is intended to relieve economic damage still resulting from the pandemic.
“The effects have to have been caused by the national emergency and the relief has to be designed to remedy those harms,” Netter said. “The fact that the pandemic conditions seem to be improving now are neither here nor there.”
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