If the Supreme Court strikes down student-loan forgiveness, it could have 'startling implications,' Biden says — and set a strange legal precedent going forward

A Missouri-based student-loan company has found itself at the center of a lawsuit blocking student-loan forgiveness — and President Joe Biden's administration said its role could set a strange legal precedent moving forward.

It's a critical year for millions of student-loan borrowers as Biden's plan to cancel up to $20,000 in student debt will have its day at the Supreme Court on February 28. For over two months, implementation of the relief has been blocked due to two lawsuits against the administration. One was filed by two student-loan borrowers who did not qualify for the full $20,000 amount of relief, and another by six Republican-led states who said the relief would hurt their states' tax revenues, along with that of student-loan company MOHELA.

Student-loan borrowers have had quite the year in 2022 — and millions are confused about what it means for their finances in 2023.

In August, a moment millions of federal borrowers had been waiting years for finally arrived when President Joe Biden announced $20,000 in student-debt cancellation for Pell Grant recipients making under $125,000 a year, and $10,000 in relief for other federal borrowers under the same income cap.

While the amount wasn't as expansive as many might have been hoping for — some Democratic lawmakers were pushing the president to cancel $50,000 in student debt — it still marked a significant step toward providing long-awaited relief to millions of Americans.

"For too many people, student loan debt has hindered their ability to achieve their dreams—including buying a home, starting a business, or providing for their family," Education Secretary Miguel Cardona said after the loan forgiveness was announced. "Getting an education should set us free; not strap us down!"

But the relief quickly ran into hurdles. Since the loan forgiveness had an income cap, the Education Department was unable to automatically cancel the debt and needed until October to make an online application available for borrowers. Conservative groups used that time to file lawsuits to block the relief, and Biden's administration responding by further narrowing the eligibility for the relief to exclude some borrowers with privately-held loans to avoid litigation.

Still, just weeks after the application opened in early October, a ruling from the 8th Circuit Court of Appeals paused the process, barring the department from processing any new applications, and another ruling from a Texas judge later ruled the relief is illegal.

Right before Thanksgiving, Biden extended the student-loan payment pause through June 30 or whenever the lawsuits are resolved — whichever comes first — meaning the fate of the relief ultimately rests with the Supreme Court, who will begin hearing arguments on February 28. Until then, borrowers' financial futures hang in the balance.

Here are some of their stories.

Jamie Horak and Aidan Smith — two student-loan borrowers — were rejoicing just days after Biden made his debt relief announcement.

Prior to the relief, Horak had about $20,000 in student debt and worried about paying down their mortgage when payments resume. But as a Pell Grant recipient, when Horak learned they would get their entire student debt balance wiped out, they were ecstatic.

"When I saw the whole amount, the entire balance,  I was elated, relieved, and I felt like, wow, it's kind of the first time I've ever felt directly impacted by something like a political order or passing of something," Horak said.

Smith — another Pell Grant recipient — learned his entire $7,000 remaining balance would be forgiven as well, and not only was he excited for himself, but for millions of others whose lives "are going to transform."

Read the full story here.

For Nick Garcia, 42, Biden's student-debt relief was bittersweet.

While $10,000 in debt cancellation would certainly make a dent in his $39,000 balance, the college professor recognized that he was still looking ahead at years of repayment and was disappointment Biden didn't seize the opportunity to go even bigger with the relief.

"I feel disheartened because it shows that more can be done at the executive level," Garcia said. "Although I'm glad to see action from Biden that will improve the lives of millions, I don't know that it rises to the moment. It just doesn't resolve our debt crisis."

The student-loan payment pause, on the other hand, was instrumental for Garcia and his family, as it allowed them to save hundreds of dollars a month they put toward house repairs and paying down personal debts.

Still, with Biden framing this loan forgiveness as "one-time" relief, Garcia is concerned that "it sends a message that the fight is over."

Read the full story here.

To qualify for Biden's student-loan forgiveness, a borrower must have federal student loans. That shut Tanya Burnett, 57, out of the relief.

As a government worker, Burnett started her paperwork in 2016 to qualify for the Public Service Loan Forgiveness (PSLF) program, which forgives student debt for government and nonprofit workers after ten years of qualifying payments.

But when she submitted that paperwork, she was given the option to refinance her student loans with a monthly payment $200 less than what she had previously been paying — from $800 to $600 — which meant taking her federal loans to a private lender.

That seemed like a pretty good deal to her at the time, so she made that switch, but she was never told upfront that doing so would mean losing her federal benefits, like debt relief.

"I thought that lower monthly payment was great," Burnett said. "But if I had known this would totally have taken me out of the federal, and there's no connection at all regarding forgiveness, I never would have done that. It wasn't worth it."

Read the full story here.

Student-loan companies have struggled to adjust to Biden's new policies, and some borrowers have experienced the consequences.

Not only was student-loan company MOHELA tasked with implementing the debt relief, but it was also responsible for overseeing all borrowers enrolled in the Public Service Loan Forgiveness (PSLF) program.

Reforms to the program, like allowing past payments to count toward forgiveness progress, expired on October 31, and Nathan — a PSLF borrower — wanted MOHELA to confirm his payments were qualifying. It ended up being a lengthy ordeal.

"The first time I tried to call was a 144 minute estimated wait time," Nathan, 29, said. "The second time I called was a 149 minute wait. And then most recently, I tried to call and it was 50 minutes. And each of these times I didn't have time to wait. I thought it would be a quicker call. And one time I stayed on the call for nearly three hours."

Kate, another PSLF borrower, said it became "virtually impossible" to get ahold of MOHELA to confirm her paperwork went through. The inability to reach the company has kept her and Nathan's finances uncertain as debt relief loomed.

Read the full story here.

Kristopher Cabreira was "ecstatic" when Biden announced up to $20,000 in debt relief. But a decision the Education Department made on September 29 threw him for a loop.

Cabreira's student loans are federal loans managed by private banks within the Federal Family Education Loan (FFEL) program. While borrowers with those loans initially had the option to consolidate their debt into the direct federal loan program, the September guidance stated that past that date, FFEL borrowers cannot consolidate, and therefore, will not be eligible for Biden's one-time student-debt relief.

Biden's administration made this decision in an attempt to avoid a lawsuit filed by six Republican-led states who argued the debt relief would hurt the banks who would've stood to profit from the FFEL program.

But for Cabreira, and the 770,000 other impacted borrowers, it was a gut punch.

"All of a sudden, it got yanked away," Cabreira said. "That could've been $10,000 I didn't have to pay, and now that's gone."

Read the full story here.

After two courts decided Biden's student-debt relief plan would be put on pause, Guilherme Lopes, a 31-year-old first generation student, felt defeated.

As a nonprofit worker on a five-figure salary, Lopes was looking forward to $10,000 in relief to help him progress on his repayment quicker and help his family out financially — especially because he said that after immigrating from Brazil to the US, he did not have the knowledge he needed to navigate the financial student-aid system, which is partly why his debt surged.

But the lawsuits that blocked the relief didn't reflect "the American dream that we were promised coming over," Lopes said.

"It's more of the unknown, the uncertainty, it just feels like a really sick game," he continued. "Are we going to get a pause? Are our payments coming back? It's just all unnerving."

Lopes said he has faith the debt relief will ultimately prevail, but he's upset millions of Americans have been put in this position.

Read the full story here.

Matthew, a 28-year-old Republican, would see his entire student-debt balance wiped out under Biden's plan. That doesn't mean he agrees with the policy.

Since Biden announced the loan forgiveness, Matthew said he was skeptical it would ever come to fruition, and he wasn't surprised once the lawsuits started to mount.

"My generation, the millennial, Gen Z generation, are facing a significant problem with student-loan debt," he said. "I feel as though that the administration, through their strongest intent and their sincerest desires, were trying to help that generation with this policy. However, I personally believe it's the wrong policy and was, quite frankly, an illegal policy."

He, along with other conservative lawmakers, share the belief that canceling student debt is unfair to high earners and people who researched how their educations would pay off, and he said he's worried for the people who were banking on forgiveness and already spent the money as the relief remains held up in court.

Read the full story here.

Timothy Babulski, a 44-year-old adjunct professor, knows $10,000 in relief would hardly make a difference to his $230,000 balance.

But he hopes millions of other federal borrowers can experience some relief before they are thrown back into repayment.

Through recently announced reforms to the Public Service Loan Forgiveness program, Babulski is hoping to get more payments counted toward his forgiveness progress once they are implemented. But his concern right now is that if Biden's debt relief ultimately gets struck down, the White House won't pursue any alternative routes to get promised relief to millions.

"My fear, regardless of the outcome of the case, is that the White House is so desperate to restart payments and get back to normal that they've forgotten that 'normal' is a decades-long debt sentence; either way, it will be an excuse to say they'd done all the can," he said. "The only difference will be whether the majority of borrowers will be abandoned— or all of us will be."

Read the full story here.

While the administration has pushed back on the arguments in both cases and claimed neither of them have the standing to sue, the latter — involving MOHELA — is complex, given that the company itself denied it had any involvement in the case in November following the 8th Circuit ruling that blocked the relief.

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Adding to that complexity, the Justice Department wrote in a legal filing on Wednesday night that upholding the 8th Circuit's ruling would mean that "banks could sue anyone who causes financial harm to their borrowers, credit-card companies could sue anyone who causes financial harm to their customers, and governments could sue anyone who causes financial harm to their taxpayers."

Dalié Jiménez, a law professor at University of California Irvine and director of the Student Loan Law Initiative, told Insider that Biden's legal defense "did a really good job in saying that if A causes financial harm to B, and B owes money to C, then C can sue... and that's bonkers."

She added that the states' standing is questionable, and she's concerned of the legal precedent it would set should the Supreme Court rule in their favor.

"I think this is an important case," Jiménez said. "I'm a little bit afraid of what is going to happen more for the larger implications on what the Supreme Court does, what its purpose is, and its role and legitimacy.

Since the lawsuit arose, Biden's Justice Department has argued that MOHELA is a separate entity from the state and can sue and be sued on its own, and the department responded to the states' claim that the relief would cause MOHELA to stop receiving servicing fees, which would impair the company's "ability to fulfill its state-law obligation to contribute a specified amount of money to the state treasury."

"But the States have never alleged that the plan will cause MOHELA to default on its obligations to the State," the Justice Department wrote. "And it is pure speculation that, if the plan causes a reduction in MOHELA's revenues, MOHELA will respond by defaulting on its obligations rather than, say, cutting its other expenditures."

Steve Vladeck, a professor at the University of Texas School of Law, said during a Wednesday press call that every case filed in a federal court has to demonstrate that the plaintiff would be injured by the policy, that the injury can be directly traced back to the defendant, and that the relief they're seeking would address those injuries.

But the harms MOHELA could suffer are unknown and "Missouri itself is not harmed directly, and... the indirect harm Missouri suffers through the harm to MOHELA is speculative at best," Vladeck said.

And, as the Justice Department wrote in its filing, four of the states — Iowa, Kansas, Nebraska, and South Carolina — said the debt relief would also hurt their tax revenues because their state tax codes chose to include debt relief as gross income, even though federal law prevents debt relief from being taxed through 2025.

"Any harm to the States' treasuries here is likewise self-inflicted," the filing said, adding that "any resulting reduction in their tax revenues is fairly traceable not to the Secretary's plan, but instead to their own choices about how to structure their tax laws."

Should the Supreme Court rule in favor of the states, it would have "startling implications," the filing said.

"Virtually all federal actions—from prosecuting crime to imposing taxes to managing property—have some incidental effects on state finances," it said. "If such incidental effects suffice for standing, every State would have standing to challenge almost any federal policy."

While Biden's Education Department extended the student-loan payment pause 60 days after June 30 or when the lawsuits are resolved — whichever happens first — Jiménez said that if the Supreme Court ends up striking down the debt relief, it's vital the administration finds another way to deliver student-loan forgiveness before payments resume.

"I do think that even if they end up holding this particular cancellation program to not be proper, that there are other ways that the administration can do this and should do this," she said.

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