This week, the Pacific Legal Foundation filed the first serious legal challenge to President Joe Biden’s student loan jubilee. The lawsuit alleges that the plaintiff, a borrower and attorney himself, would face financial damages because of Biden’s plan to cancel student loans—giving him legal standing to file the lawsuit and have the case litigated before a judge. And until the case gets before a judge, there is no way to stop the Biden administration’s student loan giveaway—regardless of its tenuous legality.
If you’re wondering how having student loans canceled could cause financial harm, buckle up and follow me into the weeds.
The borrower had been repaying his student loans through a program called income-driven repayment (IDR). That program allows borrowers with low income relative to their balances to make reduced monthly payments and have any remaining balances forgiven after they’ve made a prescribed number of payments on their debts.
In Indiana, the plaintiff’s reported state of residence, balances forgiven in this manner are exempt from state income tax. Balances that are forgiven through Biden’s executive action, on the other hand, are not exempt from income tax. This is where the damages occur.
This borrower would have had his loan forgiven without Biden’s executive action. But now that his loans are automatically forgiven through a different program, they become taxable and he owes more than he would have without federal forgiveness.
The case is only superficially about this borrower’s individual circumstances. The motive for the lawsuit, which is clear in the filing, is to litigate the legality of the executive order. The plaintiff is employed by and is represented by the Pacific Legal Foundation, a nonprofit legal organization that “defends Americans’ liberties when threatened by government overreact and abuse.” The filing argues that the administration’s claim of authority to cancel debt based on a 2003 law passed to aid Iraq war veterans and their families is illegitimate and that cancellation can only legally be accomplished through an act of Congress. The law does allow student loans to be modified through executive action in instances of national emergency or war, but the filing argues that the current political moment fails to rise to that standard.
The White House responded quickly to the filing by arguing borrowers set to receive automatic forgiveness would be able to opt out of having their loans forgiven. Since this had not previously been specified in any existing official communication, one can only presume that this was done to fend off the legal challenge. It’s probably too soon to tell whether this modification of the order will eliminate the legitimacy of the Pacific Legal Foundation’s case, but it might be enough to undermine their challenge.
Student loan cancellation would be life changing for millions of borrowers, but that doesn’t make it good policy. The reason to challenge this effort isn’t to prevent the borrowers who would benefit from enjoying the financial freedom that would come from this unanticipated windfall, but rather to reserve federal resources for more worthy causes; ones that deliver necessary support to the neediest members of our society.
This is most likely the first of many legal challenges to President Biden’s efforts to cancel student debt through executive order. Others might be harder to fend off.
The clock is ticking on getting an injunction to stop the funds from going out the door to forgive borrower balances. Even if a lawsuit is not successful before the application for cancellation goes live in October, it will be important to litigate this issue. Preventing future executive actions from further burdening taxpayers with the cost of canceling billions of dollars of affordable student debt is a cause worth pursuing.
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