What to Know About the Latest Lawsuit Targeting Student Loan Forgiveness

A new lawsuit aiming to strike down President Joe Biden’s most recent efforts to reduce $39 billion in student loans student loan debt for more than 800,000 borrowers was filed on Friday. 

The Cato Institute and Mackinac Center for Public Policy—two organizations that promote free markets and other libertarian ideals— are suing the Biden Administration for its plan to forgive student loans for borrowers who have made either 20 or 25 years of monthly payments towards their income-driven repayment plans. Plaintiffs are also targeting account adjustments made for borrowers enrolled in a public service loan forgiveness plan.

The Administration’s forgiveness efforts are part of the previously announced one-time account adjustment program, which sought to address the “historical failures in the administration of the Federal student loan program in which qualifying payments made under IDR plans that should have moved borrowers closer to forgiveness were not accounted for.”

The Administration announced in July that they would begin to notify borrowers if they qualified for forgiveness. Discharges on their loans are set to begin on Aug. 13. 

The two organizations allege that the program is unlawful, and that the Biden Administration did not go through the proper channels to approve the measure. “Despite its massive expense and impact on the legal rights and obligations of millions of borrowers, the Department did not promulgate this policy through mandatory notice-and-comment and negotiated rulemaking procedures,” the filing complaint says. “Instead, it used a press release that neither identified the policy’s legal authority nor considered its exorbitant price tag.”

The Education Department has not released an official statement about the lawsuit yet.

Here’s what to know.

What is the account adjustment?

In April 2022, the Biden Administration announced a one-time account adjustment aimed at helping borrowers that were previously steered into forbearance—which allows borrowers to pause their monthly student loan payments, but does not stop interest from accruing—instead of enrolling in alternatives like an income-driven repayment plan. Income-driven repayment plans adjust student loan payments to anywhere from 10-25% of a borrower’s discretionary income, often making payments more affordable. Borrowers enrolled in this type of plan can see their student debt forgiven in 20 or 25 years, depending on the type of loan they took out. 

Under the account-adjustment, the Education Department said they would automatically review a borrower’s payment history and count late or partial payments towards that 20 or 25 year count. They also said they would give borrowers credit for any months in forbearance. Borrowers enrolled in a public service loan forgiveness plan, which forgives student loans after 10 years of payments, would also see adjustments. 

The first set of borrowers who would be eligible for forgiveness under the adjustment were informed by the Education Department on July 14. The Department of Education said they plan to continue informing borrowers that they are eligible for forgiveness every two months until 2024.

What's in the lawsuit?

Plaintiffs say that the Administration’s forgiveness efforts are “substantively and procedurally unlawful” because it would count non-payments, or periods when a borrower is in forbearance and does not have to make any payments towards forgiveness. 

Under the College Cost Reduction and Access Act of 2007, the Secretary of Education has the authority to forgive debt for borrowers enrolled in a public service loan forgiveness program if they make 120 qualifying monthly payments. However, according to the filing, “there is no statutory or regulatory provision for non-payments during periods of forbearance to count toward PSLF’s requirement of 120 monthly payments. As even late or partial payments under a qualified plan do not count, non-payments clearly do not count.” The same is true for income-driven repayment plans, the plaintiffs allege. 

The lawsuit also says that the Education Department should have undertaken a notice-and-comment rulemaking procedure, which requires that agencies notify the public of proposed regulations and allow for a period of feedback from the public before the rule is enacted. 

Plaintiffs add that the account adjustment does not adhere to the Constitution’s Appropriations Clause, which puts Congress in charge of canceling debt that is owed to the Treasury.   

Because the one-time account adjustments could count up to three years of additional payments towards forgiveness, and could cancel debt for an additional 2.8 million borrowers on an income-driven repayment plan in the future, plaintiffs say that the cancellation plan could cost taxpayers up to $175 billion in lost payments and interest. 

This isn’t the first time the two organizations were involved in litigation surrounding student loans. The Cato Institute previously sued the Education Department, saying that President Biden’s plan to forgive up to $20,000 in debt was unlawful. The Mackinac Center also sued against student loan payment pause extensions. 

Plaintiffs are asking the court to declare the account adjustment unlawful, put the program on pause, and stop any student loan cancellation to occur because of it. It is unclear where the program stands in light of the lawsuit, and whether borrowers who were informed of their eligibility for forgiveness will be affected.

Student loan payments are set to restart on October 1.