Last Wednesday, around the time President Biden announced his student loan forgiveness plan, the Office of Legal Counsel (OLC) released its opinion stating that the president had the unilateral authority to forgive federal student loans. The Secretary of Education’s general counsel also issued its own opinion with similar reasoning. Republican lawmakers and some people who do not qualify for loan forgiveness were not pleased with this and are currently looking into challenging this in court. Biden’s current student loan proposal will benefit 43 million Americans, 90% of whom earn less than $75,000 per year.
But will a court challenge succeed? And who would have standing to challenge the administration?
A court challenge to Biden’s loan forgiveness proposal will focus on whether Congress intended to give the Secretary of Education authority to forgive student loans on a broad level without explicit congressional authorization.
The president relied on the HEROES Act, a law passed in 2003 by Republicans who controlled both houses of Congress and the White House at the time. The statutory text in question states that:
Notwithstanding any other provision of law, unless enacted with specific reference to this section, the Secretary … may waive or modify any statutory or regulatory provision applicable to the student financial assistance programs … as the Secretary deems necessary in connection with a war or other military operation or national emergency …
The OLC’s opinion states that the plain text of the statute gives the Secretary authority to waive payment of federal student loans. The statute also plainly states that the waiver does not have to be done on a case-to-case basis and with minimal administrative requirements.
The legislators’ intent is not clear on student loan forgiveness. But considering the state of the nation in 2003 when the country was reeling from the aftermath of the 9/11 attacks and the subsequent invasion of Afghanistan, Congress wanted to give the president and the Department of Education broad powers to help students financially. And the president should be allowed to take action quickly as the country improves its homeland defenses and started the War on Terror against the Axis of Evil.
But just to be safe, the Department of Education did not make every federal student loan holder eligible for forgiveness, in order to avoid making it look like a massive forgiveness plan. Biden also stated that did not want student loan forgiveness going to rich doctors and lawyers and Ivy League school graduates. Instead, the department stated that it will provide “targeted student loan forgiveness” based on income. This appears to be consistent with Biden’s earlier targeted forgiveness actions. However, they focused on a smaller group of enrollees of for-profit schools that were accused of predatory admissions practices and falsifying post-graduate employment statistics.
While the statutory language is indeed explicit, there may be cases where if the impact is significant, specific congressional approval would be required.
For example, in the recently decided case Alabama Association of Realtors v. Department of Health and Human Services, the Supreme Court reversed the Center of Disease Control’s second eviction moratorium due to COVID-19. It held that the agency did not have the authority to issue the moratorium and that a new moratorium required congressional approval. It stated that Congress could speak clearly when authorizing an agency to exercise the powers of vast economic and political significance.
Few would disagree that forgiving student loans for 43 million Americans would have a vast economic impact. Many have argued that forgiving student loans would boost the economy. Also, a Wharton study estimated that student loan forgiveness alone would cost up to $519 billion.
As for political significance, student loan cancellation is the deciding factor for some in deciding who to vote for. Forgiving $10,000 in student loans was a campaign promise by candidate Biden back in 2020.
And as for standing, in the case Lujan v. Defenders of Wildlife, the Supreme Court held that to have standing to sue, there must be 1) an injury of fact that is actual, concrete, and particularized; 2) a causal connection between the injury and the conduct complained of; and 3) a likelihood that exercise of judicial power will redress the injury. There are a few groups of people who could have standing.
The first are those who have federal student loans but whose income exceed the $125,000/$250,000 maximum. Their injury is the loss of $10,000 in debt cancellation. However, if the litigant is extremely wealthy, it may be arguable whether he or she suffered an injury. The ideal litigant would be someone who just barely earns over the income maximum and lives in a high cost of living area where $125,000 per year is considered middle class income. Any Manhattan or San Francisco residents interested?
For similar reasons, another potential plaintiff who could have standing is someone who has a commercially held Federal Family Education Loan Program (FFELP) loan and the Secretary of Education later determines these loans will not qualify for forgiveness. Why should they be denied forgiveness if they meet the income requirement?
Conversely, if FFELP loans are eligible for forgiveness, a potential plaintiff with standing could be a bank or holders of Student Loan Asset-Backed Securities which funded the loans and are collecting interest during repayment. These entities could lose out on future interest payments due to the forgiveness. However, the federal government (who are the loan guarantors) will pay the forgiveness amount to the bank. If the repayment agreement does not have prepayment penalties, they may not suffer an injury necessary to establish standing.
Given the divisive opinions regarding student loan forgiveness, a court challenge is likely. It remains to be seen if the courts believe that the political and economic impact of forgiving student loans is significant enough to require specific congressional approval before doing so.
Steven Chung is a tax attorney in Los Angeles, California. He helps people with basic tax planning and resolve tax disputes. He is also sympathetic to people with large student loans. He can be reached via email at email@example.com. Or you can connect with him on Twitter (@stevenchung) and connect with him on LinkedIn.