James A. Finley/AP Photo
The Missouri Higher Education Loan Authority is a servicer of direct loans to student borrowers.
A federal judge was skeptical of some plaintiff arguments on Wednesday in a case seeking to enjoin the Biden administration’s student debt cancellation program. The case is one of several working their way through the courts, some of which have already been rejected. This case, Nebraska v. Biden et al., is seen as one with the largest possibility of success.
However, one of the key plaintiffs in the case, a loan servicer affiliated with the state of Missouri, could be on the hook for as much as $175 billion if it impedes borrowers (who hail from across the nation, not just Missouri) from receiving debt forgiveness, according to a notice from the American Federation of Teachers (AFT) and the Student Borrower Protection Center (SBPC) released on Tuesday.
U.S. District Court Judge Henry Autrey got the plaintiffs in the case—the states of Nebraska, Missouri, South Carolina, Iowa, Kansas, and Arkansas—to concede that ongoing student debt forbearance, in the form of a payment pause that has been in place for two years, would be allowable legally. In other words, under the states’ argument, an open-ended zeroing-out of payments is legal, but an outright cancellation of those payments is not.
The government has invoked the HEROES Act, a 2003 law that allows the secretary of education to assist those affected by a national emergency through loan modifications or discharges, as its authority for action. That action was filed in the Federal Register on Wednesday. The government also noted in oral arguments that the Higher Education Act of 1965 already gives the secretary of education broad authority to modify or cancel loans.
Judge Autrey cited the “major questions” doctrine, which the Supreme Court invoked to invalidate a power plant emission reduction program in West Virginia v. EPA earlier this year, stating that federal agencies cannot engage in major economic events if Congress was relatively silent on that use of statutory authority. The judge asked whether loan cancellation, estimated at $300 billion, was large enough to rise to the level of major economic impact, and whether it was envisioned by the HEROES Act.
The government’s attorney replied that the debt cancellation program is large because the national emergency is large, and that the program is designed to remedy potential harms, like an expected flood of delinquencies when the payment pause is lifted.
Judge Autrey appeared annoyed by the inclusion of President Biden as a defendant in the case, on the basis that he made an August announcement at the White House about debt cancellation, which is not a recognized action under the Administrative Procedure Act.
“In a pleading you set up the ingredients for the cake,” Judge Autrey told the plaintiffs. “But it’s hard to make a cake if you don’t have a pan to put the cake in. That pan is standing.”
“Standing” is the main obstacle to those wanting to take down the student loan cancellation program. To prove standing, a plaintiff must show specific harm from whatever action over which they are suing. And it’s difficult to pull that off when the issue is a benefit like debt cancellation.
The government has invoked the HEROES Act, a 2003 law that allows the secretary of education to assist those affected by a national emergency.
The plaintiffs have made three standing arguments. First, some states own privately issued student debt, directly or indirectly, and if those loans are consolidated into direct loans that are then forgiven, they lose revenue. Second, the Missouri Higher Education Loan Authority (MOHELA) services direct loans on behalf of the federal government, and it would lose revenue if the loans it services are discharged, as well as taking on costs from facilitating debt cancellation. And third, some states would lose tax revenue if loans are forgiven and, per the American Rescue Plan, those forgiveness actions are not taxable events, meaning they don’t show up in federal adjusted gross income, on which these states rely for tax revenues.
The government changed its program by putting a deadline of September 29, the day the lawsuit was filed, for eligibility for debt relief from consolidation from private loans into direct loans. That would seem to foreclose the first standing argument. The third one, involving lost tax revenue, isn’t even about the debt cancellation program itself but a provision of the American Rescue Plan, so it’s hard to see how that would bear on the program.
But MOHELA is certainly a servicer of direct loans, and therefore cancellation would affect its revenues. And only one form of standing would be required in order to get the case into court.
In response, the government stated that the state of Missouri hasn’t established it can sue over MOHELA’s injuries, pointing out that Missouri had to file a state public records request to even find out what injuries MOHELA would suffer.
In addition, the government said that any injury on MOHELA’s part would be subject to the contract that such servicers sign with the federal government, which explicitly states that servicers get no guarantee that they will retain their loan volumes. It also said that any disputes would be subject to the Contract Disputes Act, where MOHELA could appeal for money in the Court of Federal Claims, but could not enjoin the entire program.
In a rebuttal, the plaintiffs said MOHELA is a state instrumentality and therefore the state could file the lawsuit, and that the Contract Disputes Act doesn’t apply to a claim under the Administrative Procedure Act that the debt cancellation program was improperly filed.
But MOHELA might have another problem with pursuing this case. In a six-page “demand letter,” AFT and SBPC ask the servicer to cease and desist its efforts to interfere with federal loan cancellation. This is a first step under a California law known as the Student Borrower Bill of Rights.
Student loan servicers violate that law if they interfere with a borrower’s right to loan forgiveness. AFT and SBPC argue that MOHELA is in violation of the California law in two ways: first, by filing the lawsuit that seeks to block student debt cancellation entirely, and second, by understaffing its call centers where borrowers are seeking information about the cancellation.
The letter says that borrowers have reported wait times of hours to contact a customer service representative, as well as busy signals and wrong-number messages. “It appears that MOHELA has made a deliberate decision to decrease client calls, given that when the company stands to profit, it is able to issue an alarming number of calls to its customers,” the letter concludes.
While the letter nods at other violations of state and federal law, as well as numerous examples of unlawful conduct in the past by MOHELA that involved blocking borrowers from relief to which they were entitled, the California violation poses a particular hurdle to the company. The demand letter begins a 45-day clock under California law, during which MOHELA must provide a remedy to California borrowers seeking debt forgiveness.
If it does not, the letter states, “we expect MOHELA to immediately and independently compensate all California borrowers directly harmed by its illegal, substantial interference … we estimate that the cost of this injury to California student loan borrowers totals more than $55 billion.”
SBPC added that, if MOHELA didn’t pay up, they would seek treble damages in court, which are available under California law, bringing the penalty to $175 billion.
All of which means that MOHELA, the entity with the biggest potential opportunity to have standing in a case against the student debt cancellation program, will have to figure out whether it wants to risk bankrupting itself in the process of pursuing the case.
