In one of the first significant legal challenges to President Joe Biden’s student loan forgiveness plan, a public interest lawyer filed a lawsuit Tuesday arguing that the policy is an abuse of executive power.
Plaintiff Frank Garrison claims that because of the forthcoming student loan forgiveness, he will be forced to pay state taxes on the amount canceled – an expense he would otherwise avoid.
The lawsuit is backed by Garrison’s employer, the Pacific Legal Foundation – a nonprofit libertarian law firm. It was filed in the US District Court for the Southern District of Indiana, the state where Garrison resides.
The lawsuit, which names the Department of Education as a defendant, challenges the agency’s “unacceptable abuse of executive authority to restore the rule of law and to enforce the Constitution’s separation of powers,” according a press release from the Pacific Legal Foundation.
White House spokesman Abdullah Hasan said in an emailed statement that “the claim is baseless for a simple reason: No one will be forced to get debt relief. Anyone who does not want debt relief can choose to opt out.”
When asked about the lawsuit at Tuesday’s White House briefing, press secretary Karine Jean-Pierre also said that anyone who doesn’t want student debt relief will be able to opt out.
“Opponents of the Biden-Harris administration student loan plan are trying to stop it because they know it will provide much-needed relief for working families,” she added.
How Biden’s plan will work
Under Biden’s plan, individual borrowers who earned less than $125,000 in either 2020 or 2021 and married couples or heads of households who made less than $250,000 annually in those years will see up to $10,000 of their federal student loan debt forgiven.
If a qualifying borrower also received a federal Pell grant while enrolled in college, the individual is eligible for up to $20,000 of debt forgiveness. Pell grants are awarded to millions of low-income students each year, based on factors including their family’s size and income and the cost charged by their college. These borrowers are also more likely to struggle to repay their student debt and end up in default.
Borrowers will not have to pay federal income tax on the student loan debt forgiven, thanks to a provision in the American Rescue Plan Act that Congress passed last year.
But there are a handful of states, including Indiana, that may tax discharged debt if state legislative or administrative changes are not made beforehand, according to the Tax Foundation. The tax liability could be hundreds of dollars, depending on the state.
Under Biden’s plan, which was announced in August, no debt cancellation has occurred yet. The first wave of forgiveness is expected to be granted in October, at the earliest.
The Congressional Budget Office has estimated that Biden’s plan could cost the government $400 billion over time, but warned that the estimate relies on several assumptions and is “highly uncertain.”
How the plaintiff is allegedly harmed
Garrison claims that he will qualify for $20,000 in student loan forgiveness under Biden’s new plan and, as a result, will face a state tax liability of more than $1,000 for 2022.
Furthermore, Garrison is already pursuing federal student debt relief through the Public Service Loan Forgiveness program – meaning that he expects the government to cancel his remaining balance in a little more than four years, according to the lawsuit. The PSLF program grants forgiveness to qualifying public sector workers after they make 10 years of payments, and the amount canceled is not taxable.
But because he would receive $20,000 in loan cancellation before making enough qualifying payments under the Public Service Loan Forgiveness program, Garrison will incur a tax bill that he would otherwise not face, he said. Meanwhile, the $20,000 reduction will not change either his monthly payment obligation or the total amount of the loans he must repay, according to the lawsuit.
What happens next
The Pacific Legal Foundation is asking for the court to prohibit the government from enacting student loan cancellation under Biden’s plan.
But Luke Herrine, an assistant law professor at the University of Alabama who previously worked on a legal strategy pushing for student debt cancellation, is skeptical the lawsuit will be successful.
The case, he said, hinges in part on whether the plaintiff can opt out of the new student loan forgiveness policy. The Department of Education has yet to issue formal guidance on the policy, so it’s currently unclear who may be able to opt out of the debt relief and how.
“I don’t think this case is ripe,” Herrine said, referring to legal doctrine that limits a federal court’s jurisdiction when it’s too early to decide a case.
“A court doesn’t rule on things that may or may not happen in the future,” he said.
Abby Shafroth, a staff attorney at the National Consumer Law Center, said the “lawsuit is fundamentally flawed,” noting that she expects the government will provide an opportunity for borrowers to opt out and decline debt relief when it rolls out the program next month.
“So the plaintiff will not actually be harmed by the student debt relief plan and therefore does not have standing to sue,” Shafroth said.
More lawsuits challenging Biden’s student loan forgiveness plan could be forthcoming. Arizona Attorney General Mark Brnovich, a Republican, has said he is working on developing the best legal theory to sue the administration over the action.
A conservative advocacy group called The Job Creators Network is also weighing its legal options, planning to file a lawsuit once the Department of Education formalizes the student loan forgiveness plan in October.
An Oregon resident who is representing himself also filed a lawsuit over Biden’s student loan forgiveness plan earlier in September. He argues that the cost of the debt cancellation will cause the Federal Reserve to raise interest rates to address inflation – causing his mortgage rate to increase.
This story has been updated with additional information.
Source: www.cnn.com