Legal Challenges to Student Loan Debt Cancellation Begin to Take Shape

By Hugh T. Ferguson, NASFAA Managing Editor

Opponents of President Joe Biden’s student loan debt cancellation plan are attempting to mount a legal challenge, with a borrower alleging that the move could directly result in their financial harm should the Department of Education (ED) automatically apply the discharge.

In what appears to be the first legal challenge to the administration’s authority, the Pacific Legal Foundation, a nonprofit legal organization, alleges that the move ignores Congress’ legislative authority, takes an expansive view of executive powers, and would cause financial harm to their plaintiff.

The Biden administration, as a part of its announcement to carry out debt relief also unveiled a highly anticipated memo that outlined the administration’s authority to offer broad student loan forgiveness. The Pacific Legal Foundation argues that the memo’s reasoning violates the Executive Branch's constitutional authority.

According to the legal filing the plaintiff — Frank Garrison, an Indiana resident who is a full-time nonprofit employee — would be eligible for loan cancellation under the Public Service Loan Forgiveness (PSLF) program, but due to Indiana’s impending taxation of the automatic relief Garrison could face an unexpected tax liability.

Due to varying state laws, millions of borrowers may have to pay state income tax if they receive the relief from debt cancellation. Recently, the Indiana Department of Revenue confirmed to The Associated Press that residents are required to list their forgiven loans as taxable income per Indiana law.

Garrison, according to the legal filing, was a Pell Grant recipient, has enrolled in an income-driven repayment plan, and as of October 2021 has made 57 qualifying payments toward PSLF and expects to qualify for forgiveness in roughly four more years.

Currently ED is expected to release a “simple” application for loan cancellation in early October, at which time more parameters, like automation and the potential ability for borrowers to opt out of the relief, could become clearer.

Conservative groups as well as GOP attorneys general have indicated that they will continue to look for ways to prevent the administration from administering the debt cancellation.

Rep. Virginia Foxx (R-N.C.), ranking member of the House Committee on Education and Labor, on Tuesday, issued her support for the legal challenge to prevent the administration from implementing the debt cancellation plan.

“The Biden administration’s student loan bailout should be squashed by the heel of the law—its illegality must not be ignored,” Foxx said. “Thankfully, the Pacific Legal Foundation has taken a stand and knocked down the first domino in what will surely become a legal referendum against the Department of Education and the entire administration.”

Stay tuned to Today’s News for the most recent updates concerning the rollout of the administration’s student loan relief plans. 


Publication Date: 9/28/2022

Gina P | 9/28/2022 2:12:58 PM

Frank Garrison or any other borrower will NOT have to apply for the forgiveness. Also, the state tax liability in Indiana is roughly 3.5% , which is about $700. Does Mr. Garrison realize that reducing his principal amount by $20,000 will reduce the payment amounts he is making toward PSLF? I really hope the Biden administration requires everyone to apply for debt forgiveness, which will make this ridiculous legal filing void. All borrowers who think this debt cancellation is ridiculous can simply not apply for it.

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