A conservative law organization has launched the first legal challenge to President Biden’s student loan debt forgiveness plan, calling the policy “flagrantly illegal” because it wasn’t authorized by Congress.
Biden’s plan would wipe out the student loan debt of 20 million borrowers, and reduce the debt of 23 million more, but the lawsuit claims that it financially harms the borrowers in seven states whose debt cancellation will be taxed.
“Congress did not authorize the executive branch to unilaterally cancel student debt,” Caleb Kruckenberg, an attorney at Pacific Legal Foundation, which brought the lawsuit, said in a statement. “It’s flagrantly illegal for the executive branch to create a $500 billion program by press release, and without statutory authority or even the basic notice and comment procedure for new regulations.”
Under Biden’s plan, borrowers who make less than $125,000 per year will receive up to $10,000 in federal student loan forgiveness. Borrowers who attended college with Pell Grants, designed to help low-income students, are eligible for up to $20,000 in forgiveness if they meet the same income requirements.
The lawsuit references a Penn Wharton Budget Model analysis, which estimates Biden’s plan will cost up to $519 billion over 10 years. A report by the Congressional Budget Office, published Monday, estimated the plan could cost about $400 billion
The lawsuit, Garrison v. U.S. Department of Education, was filed in the U.S. District Court for the Southern District of Indiana on Tuesday.
Who is suing?
The lawsuit’s plaintiff is Frank Garrison, a Pacific Legal Foundation attorney in Indiana who received a Pell Grant to attend college and qualifies for $20,000 in debt forgiveness under Biden’s plan because he makes less than $125,000 per year, according to the complaint.
The lawsuit hinges on the income taxes that will be applied to student debt forgiveness in some states, arguing that debt cancellation will cause Garrison “to incur a financial obligation that he would not otherwise have faced.”
Garrison has been paying off his student loans through the Public Service Loan Forgiveness (PSLF) program, which offers debt forgiveness to borrowers who pursue public-service careers. And he expected to receive full forgiveness through the PSLF program in about four years, according to the lawsuit.
But under Biden’s new plan, about eight million borrowers who qualify for debt forgiveness and whose financial information is already on file with the Department of Education, including Garrison, will have forgiveness automatically applied to their accounts beginning in October.
He argues that’s a problem because he’ll have to pay income taxes on that debt forgiveness. Seven states, including Indiana, are planning to tax student debt forgiveness as income, according to an analysis by the Tax Foundation, an independent nonprofit focused on tax policy.
Garrison’s lawsuit claims that while his debt forgiveness would not be taxed if he continued under the PSLF program, he will owe more than $1,000 in income taxes when he automatically receives $20,000 in forgiveness under Biden’s plan.
“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 press release about the case. “He did not ask for cancellation, doesn’t want it, and has no way to opt out of it.”
Will this delay student loan forgiveness?
The Pacific Legal Foundation filed a temporary restraining order to stop the loan forgiveness plan from taking effect. But a judge has yet to rule on that order.
While the lawsuit argues Biden lacked the authority to cancel student debt, the Biden Administration has argued the President has the authority to cancel student debt under the Higher Education Relief Opportunities for Students (HEROES) Act of 2003.
The law gives the U.S. Education Secretary the authority to change student financial assistance programs during a war, military operation or a “national emergency” — in this case, the COVID-19 pandemic.
“We further conclude that reducing or canceling the principal balances of student loans, including for a broad class of borrowers who the Secretary determines suffered financial harm because of COVID-19, could be a permissible response to the COVID-19 pandemic,” Assistant Attorney General Christopher Schroeder wrote in a memo about use of the HEROES Act last month.
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