The White House’s debt forgiveness plan faced its first major legal challenge Thursday, as six Republican-led states filed a lawsuit asking a federal court to block the debt relief plan. On the same day, the Department of Education changed the eligibility requirements for the one-time forgiveness, potentially cutting hundreds of thousands of borrowers out of the initiative, but possibly mitigating the plan’s exposure to litigation.
The major hurdle the states — or any challenger — has to overcome to keep the lawsuit moving forward is establishing standing, or the right to sue, by proving student-loan cancellation will cause the parties harm.
The loan holders get paid off when borrowers consolidate, but “they incur what’s called prepayment risk,” Herrine said. “They’re expecting a stream of payments over time and they can borrow against that stream and the timing of payments matters.” For the purposes of standing the harm doesn’t have to be large, Rubenstein said. Instead, what matters is “actual or imminent harm, not the size of the alleged harm.”
Still, the lawsuit filed Thursday argues that the Department is using an overly broad interpretation of the HEROES Act to legally justify the plan. “It is inconceivable, when it passed the HEROES Act,that Congress thought it was authorizing anything like the Administration’s across-the-board debt cancellation,” the attorneys general wrote in the complaint.
The attorneys general also argue that the Biden administration’s decision is “arbitrary and capricious,” or that the reasons officials are pursuing the debt relief aren’t related to their legal authority in the HEROES Act, but are instead political and pretextual, Rubenstein said.
If that happens or if the case continues to wind through the legal system in other avenues, borrowers seeking relief could be left in limbo, said David Bergeron, a former Department of Education official who has supported debt cancellation, but preferred it be done through Congress. Servicers say they will be taking those steps even as the interests of one of their own is implicated in the state attorneys general suit. Though MOHELA isn’t a plaintiff in the case, the alleged harm the debt relief would cause to the organization is at the suit’s core.
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