Blog

Monday, March 20, 2023

Why Challenging Student Loan Forgiveness is Challenging

Background

President Biden's Student Loan Forgiveness Case (Department of Education v. Brown) serves as a wonderful illustration of the myriad issues swirling around in a Supreme Court case. The media tend to simplify these cases to the point that the real questions are distorted, so it's beneficial to go over them from time to time.

With any Supreme Court case, there are several questions that can be answered:

• Is the policy in question a good one, one which the government should enforce?
• Is the policy in question legal? Is the President doing something that Congress did not empower him to do? Did Congress pass a law that the Constitution forbids?

Typically, most media outlets will focus on the first question, because it's the simpler to understand and fight over (and also is more likely to implicate the outcome the media prefers). However, the first question is never the question that the Supreme Court should be deciding, and at least officially, it never does. Instead, it is meant to consider the second question.

The cynical would argue that the Supreme Court is really just deciding based on how they feel about the first question. To the extent that's true, it's very difficult to prove, but what is unquestionably true is that even if that's the case, they try to couch their decisions in terms of whether Congress or the President has the ability to do something, not whether they should or not.1

In the context of the student loan forgiveness case, the questions become "Is it good policy to forgive student loans?" and "Does President Biden have the authority to forgive student loans?"

On the first question, there are many dimensions that come into play: how much should be forgiven, who should be forgiven, is it unfair for the people who paid off their debts or worked to avoid debt. These are all questions for legislators to hash out in determining a policy that satisfies many competing interests. These are not questions that the should enter the minds of the Justices.

Their only consideration should be the legality. Did Congress or the President have the authority to act in the way that they acted? In this case, few people would argue that Congress could not legislate some kind of loan forgiveness, and no one here is arguing that Congress did not have authority because the loan forgiveness was initiated by the Biden administration. The case, therefore, is about whether Biden (and his Department of Education) were empowered to enact such a sweeping forgiveness program.

On that point, there is widespread skepticism of Biden's move including from Nancy Pelosi and the Washington Post editorial board. I will leave the debate on the merits and the legality to others.

Standing

There is, however, a third question that arises in Supreme Court cases, and that is standing. Simply put, to be able to challenge an act of Congress or the President (or anyone) in court, you have to have been harmed by the act. In most cases, this is not a large hurdle to overcome. Go through the worst cases, and most of them have an obviously harmed party--The EPA's regulation would have cost power plants money, Korematsu was a Japanese citizen forced to relocate to an internment camp, Hobby Lobby was being forced to pay for reproductive services for its employees.

In Dept of Ed v Brown, it's not as clear if anyone is harmed because the effect of the act is to reduce debt, so no one is supposed to be made worse off, only better off. In fact, the Biden administration modified its plan after its original trial-ballooning to narrow its scope in order to exclude parties that could claim some harm and be able to challenge it.

The issue of standing has been more significant than most people realize because most coverage of court issues defaults to the goodness or badness of the policy in question, and reporters either don't understand the legal arguments or they think their audiences don't want to read them. For example, a substantial number of the lawsuits brought by the Trump campaign in the aftermath of the 2020 election were dismissed due to lack of standing.

In 2021, before the Dobbs decision overturned Roe v. Wade and states wanting to outlaw abortions had to figure out ways to get around the Court-granted right, Texas devised a sue-your-neighbor-for-abortion policy specifically to avoid challenges. Since any clinics that might be sued were not being harmed by the state, no government officials or representatives could be sued. By designing it this way, Texas relied on standing to prevent any lawsuits, at least in the short-term, and the Supreme Court agreed.

Standing is a major issue with the Student Loan Forgiveness case. Because Biden designed (and modified it) so that it would not bring harm to anyone. The recipients of the forgiveness are obviously better off because the debt they are obliged to repay has been reduced or eliminated. Presumably, the lender would be the losing party as they lose out on the interest that students would pay while servicing their loan. However, only 7% of student loan debt is held by private lenders, who would have standing. The other 93% is held by the federal government (who does have standing but since they're the ones pursuing this, they won't sue themselves!).

Further, the forgiveness does not apply to the 7% of loans that are held by private institutions, so they are unharmed and cannot challenge.

In one interesting challenge, an individual who was eligible for the loan forgiveness claimed that he would be harmed because the state he lived in would consider the debt cancellation as income and would tax it. In addition, he receives no offsetting benefit for the forgiveness, which would negate his claim since he would receive more than he would need to pay, because he was participating in the federal Public Service Loan Forgiveness program already. That program would already forgive his loan without subjecting him to additional state taxation.

While this challenge would provide standing to the challenger under the policy as announced on the Department of Education's website, which claimed that the debt cancellation would be automatic, if the plaintiff was allowed to opt-out of the policy, then any harm that the policy caused would be self-inflicted because he would have to actively pursue it himself. The administration realized this between the time the case was filed and before the policy was formalized, and changed its website's description of the forgiveness and replaced the mention of automatic relief with the opt-out "clarification." The litigation is still active, and it's unclear whether he has standing.

More info here

The MOHELA Case

Even the case that was argued at the Supreme Court features insightful complications. MOHELA, the Missouri Higher Education Loan Authority, is a government-created and run servicer of loans in Missouri. Because MOHELA receives revenues from servicing the loans in question, they would be financially harmed if the loans were forgiven. To my knowledge, no one questions whether MOHELA itself has standing, but MOHELA itself (and its administrators) chose not to sue the Department of Education. The state of Missouri, then, sued on its behalf, so the debate over standing has become a debate over whether MOHELA is independent of the state, and to what degree, if the state of Missouri can sue on their behalf.

Wherefore Not Taxpayers

You may ask yourself, all of these debates over standing seem to be debates over the interest, the incidental taxes, or other indirect components of the debt, but if debt is being cancelled, surely someone is paying for that. If a bank cancels your debt, then the bank has taken a loss on the principal and the interest. In this case, who is paying for the principal and why can they not sue. The answer to that, dear taxpayer, is you. As the holder of debt, the U.S. government is owed vast sums of money. If the government erases it, future revenues that would pay for myriad government programs will not be available and those programs will need to be funded through taxes and debt (ultimately paid for through taxes).

If taxpayers are on the hook, why can't they sue. In another of the enormously significant Supreme Court Cases, Massachusetts v. Mellon determined that taxpayers do not have standing to challenge based on the notion that they would pay for any programs. This created a substantial blind spot in our legal system where Congress or the President can act unilaterally as long as their actions exclusively benefit people and harm no one. They are free, then, expend any amount of money for any cause, at taxpayer expense, and whether or not they have the authority to do so, there are extremely limited paths to rein them in.

Footnotes

1Of course, this isn't always the case. Sotomayor brought up the effects on students who are the beneficiaries of this program which has nothing to do with its legality.