Personal finance

What the first legal challenge to derail Biden’s student loan forgiveness plan means for borrowers

Porquenostudios | Istock | Getty Images

A lawyer working for a conservative legal group this week brought the first legal challenge to President Joe Biden‘s sweeping plan to cancel up to $20,000 in student debt for millions of Americans.

“Nothing about loan cancellation is lawful or appropriate,” Frank Garrison, an attorney at the Pacific Legal Foundation, said in a complaint filed in U.S. District Court for the Southern District of Indiana. 

“In an end-run around Congress, the administration threatens to enact a profound and transformational policy that will have untold economic impacts,” the complaint goes on to say. “The administration’s lawless action should be stopped immediately.”

More from Personal Finance:
Pumpkin spice lattes are popular due to ‘very simple economics’
Everything parents need to know about student loan forgiveness
Government bond yields soar as markets weigh recession threat

The main obstacle for those hoping to bring a legal challenge against Biden’s plan has been finding a plaintiff who can prove they’ve been harmed by the policy.

“Such injury is needed to establish what courts call ‘standing,'” said Laurence Tribe, a Harvard law professor.

Garrison is asserting he could be harmed by Biden’s loan forgiveness in the form of a tax bill. Canceled student debt can be considered taxable income.

Although borrowers won’t be required to pay federal taxes on their canceled student debt, thanks to a pandemic-era relief provision in the the American Rescue Plan of 2021, some states — including Indiana, where Garrison resides — may charge levies on the relief. Currently, Garrison is pursuing a government program that leads to tax-free debt cancellation, known as Public Service Loan Forgiveness, but he says Biden’s plan could now cause him to get a $1,000 state tax bill.

Here’s what the development means for borrowers.

How likely is it that this challenge will be successful?

Not too likely, said higher education expert Mark Kantrowitz.

Because people with federal student debt can opt out of forgiveness, it’ll be difficult for Garrison to prove he’ll be harmed, Kantrowitz said.

A White House spokesman, Abdullah Hasan, agreed.

“The claim is baseless for a simple reason: No one will be forced to get debt relief,” Hasan said. “Anyone who does not want debt relief can choose to opt out.”

Still, some courts might be flexible in their interpretation of “standing,” Kantrowitz said, “if they want to take the case.”  

 ”It will be interesting to watch how this and other cases play out,” he said.

Could there be other legal challenges to Biden’s plan?

Yes.

GOP attorneys general from states such as Arizona, Missouri and Texas, as well as Sen. Ted Cruz, R-Texas, and those connected to conservative think tank The Heritage Foundation, are reported to be considering their options when it comes to trying to block loan forgiveness.

“The uncertainty for borrowers in the meantime is, I’m afraid, considerable,” Tribe said.

What does this mean for borrowers?

If you have federal student loans, you should apply for forgiveness as soon as the U.S. Department of Education’s application goes live. The government says that form will be ready by “early October.”

In the meantime, borrowers can sign for updates on the application process.

If you get your loans forgiven before a lawsuit possibly gets in the way, you might get to keep the relief, Kantrowitz said, “even if the courts rule against the Biden Administration.”

To be ready to go when the application launches, check that your income and loans qualify, and gather records that may be helpful to support your request.

Products You May Like

Articles You May Like

After A Brutal Q3, Has This Software Stock Bottomed?
When Mark Cuban bought the Dallas Mavericks, he refused an office or big desk—here’s why
China might not make major changes to its Covid policy any time soon, despite weekend protests
Klarna CEO says firm was ‘lucky’ to cut jobs when it did, targets profitability in 2023
Black Friday means deep discounts for shoppers — and intense pressure for retailers

Leave a Reply

Your email address will not be published. Required fields are marked *