GILLEN: SCOTUS’s Loan Forgiveness Ruling and the Path Forward

The U.S. Supreme Court struck down the Biden administration’s student loan forgiveness plan on Friday. The administration was attempting to forgive $10,000 of student loans for borrowers making less than $125,000 per year, and $20,000 for those who had received a Pell grant. The alleged authority for this action was a 20-year-old law that allows the Secretary of Education to “waive or modify” loan terms during a war or national emergency.

As a policy matter, student loan forgiveness was terrible. As we’ve covered extensively in these pages, the policy failed on logical and rhetorical, educational, economic, moral, political, and legal grounds. Here are just a few highlights: It used the real financial struggles of a small portion of borrowers as an excuse to shower almost all college graduates with an unearned windfall. It ignored income-driven repayment plans—which guarantee payments are always affordable—that already exist and that are used by a third of borrowers. It would have exacerbated the problem it was supposedly solving, as forgiveness would encourage students to borrow even more (anticipating future forgiveness) and colleges to raise prices, both of which would lead to even higher student loan debt in the future. The cost was massive, pegged at around half a trillion dollars. It was also regressive, benefiting high earners more.

But from a legal perspective, none of that mattered. For the courts, what mattered was whether anyone could sue because they would be harmed by the policy (called standing), and whether the Secretary had the legal authority to implement the plan (the merits). And those questions are answered sequentially, meaning that if no one has standing to sue, the court wouldn’t examine the merits.

The vote was 6-3, with the six conservative justices determining both that a party had standing to sue and that the Secretary lacked the authority to implement the loan forgiveness plan. The three liberal justices argued that no one had standing to sue and that the Secretary did have the authority to implement forgiveness.

In reviewing the decision and the dissent, it is interesting to note that the conservatives take an expansive view on standing and a restrictive view on the merits, while the liberals take a restrictive view on standing and an expansive view on the merits.

Standing

Without standing, the court never would have even addressed whether the plan was legal. While 6-3 is not a particularly close vote, standing was not a forgone conclusion. Standing requires that a party to the lawsuit would suffer a concrete injury from the policy, and the Biden administration contorted itself every which way to try to prevent anyone from having standing to sue. Early on, some states sued because their Federal Family Education Loan (FFEL) portfolio (old, government-guaranteed loans issued by private entities) and servicing revenue would be negatively affected by forgiveness as people consolidated loans away from FFEL loans (not eligible for forgiveness) and into Direct loans (eligible for forgiveness). So, the Biden administration excluded recently consolidated FFEL loans to ensure those states didn’t have standing. Others sued because of state tax burdens from forgiveness, so the Biden administration made it possible to opt out. The administration was clearly trying to prevent anyone from having standing to sue, which tells you a lot about whether it thought it had legal authority for the plan. Ironically, the liberal justices complain in their dissent that “the majority’s justifications turn standing law from a pillar of a restrained judiciary into nothing more than ‘a lawyer’s game.’” I agree that standing was turned into a lawyer’s game but disagree that it was the conservative justices who did so.

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But by a strange fluke of history, the state of Missouri had created a public entity called the Missouri Higher Education Loan Authority (MOHELA), which owned and serviced student loans. Since MOHELA is paid by the Department of Education for every borrower for whom it services loans, and since forgiveness would reduce the number of those borrowers, and therefore MOHELA’s revenue, both sides agreed that MOHELA had standing to sue. But MOHELA didn’t sue—the state of Missouri did. The conservative and liberal justices disagreed on whether Missouri could sue. The conservatives argued that

By law and function, MOHELA is an instrumentality of Missouri: It was created by the State to further a public purpose, is governed by state officials and state appointees, reports to the State, and may be dissolved by the State. The Secretary’s plan will cut MOHELA’s revenues, impairing its efforts to aid Missouri college students. This acknowledged harm to MOHELA in the performance of its public function is necessarily a direct injury to Missouri itself.

In contrast, the dissent argues that

We do not allow plaintiffs to bring suit just because they oppose a policy. Neither do we allow plaintiffs to rely on injuries suffered by others … MOHELA is financially independent from Missouri … The revenue loss allegedly grounding this case is MOHELA’s alone … Which leads to an obvious question: Where’s MOHELA? The answer is: As far from this suit as it can manage.

While I’m no lawyer, it seems clear the conservatives have the better argument here. While free from liabilities, Missouri is essentially a claimant on any profits from MOHELA (similar to how a limited liability company gives owners a claim on profits without being liable for debts), and previous MOHELA profits were indeed used to pay for public higher education. The Biden plan would reduce those profits, so Missouri would suffer an injury from forgiveness and can therefore sue.

But conservatives shouldn’t be too relieved, because standing is going to be a huge problem in future efforts to fight back the next time progressives try to forgive loans (including their planned revisions to income-based repayment plans). No fewer than three lawsuits against this policy were tossed out due to lack of standing, and until the court ruled on MOHELA, it wasn’t obvious that Missouri would have sufficient standing. Consider how the stars needed to align for this standing to hold. For Missouri to win, it needed a state instrumentality engaged in student loan servicing, a state attorney general willing to sue to stop the policy, and a Supreme Court majority agreeing that the state suffered an injury. Without all three, there’s no standing, and none of them are guaranteed in the future. States, especially red states, are slowly exiting the student loan servicing system as their legacy FFEL loan portfolios shrink (new FFEL loans stopped being made in 2010), meaning there might not be MOHELA-like entities next time. And while Republican state attorneys general would be likely to sue to stop future forgiveness, those are precisely the states least likely to have a government agency handling student loans in the future. And if liberals are able to get two more votes on the Supreme Court, even this case would have been lost.

While conservatives won this round on standing, I fear it was from a historical fluke, a legacy state instrumentality in a red state that may not be around forever. Standing will be a real issue for student loan cases going forward. Consider, for example, the student loan payment pause. While the first pause, lasting from March to October 2020, was initially authorized by an act of Congress, the repeated extensions of the pause have relied on the same national emergency powers claimed for loan forgiveness. MOHELA—and, by extension, Missouri—doesn’t suffer an injury because the pause doesn’t reduce the number of borrowers it serves, which means its revenue is unaffected, so its standing wouldn’t carry over to this case. None of the student loan servicers were willing to challenge the policy, since it is usually a bad idea to sue your client. One company specializing in student loan refinancing has a promising case, but it didn’t come forward until recently, and the case hasn’t been resolved yet. The bottom line is that standing in these cases is going to be a huge obstacle for conservatives.

Merits

Once the standing hurdle was cleared, the merits were much more clearly in the conservatives’ favor. The Higher Education Relief Opportunities for Students Act of 2003 (HEROES) Act empowers the Secretary of Education to “‘waive or modify any statutory or regulatory provision applicable to the’ Title IV programs ‘in connection with a … national emergency’ to ensure, among other things, that ‘affected individuals are not placed in a worse position financially.’”

In the 20 years since its passage, the act was mostly used to waive minor legal requirements of various programs in special circumstances. It was also the basis for the extension of the student loan payment pause, though the legality of this has never been evaluated (the case brought by the refinancing company has not been resolved).

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The majority argues that the new forgiveness plan exceeds the Secretary’s authority.

The Secretary’s plan has “modified” the cited provisions only in the same sense that “the French Revolution ‘modified’ the status of the French nobility”—it has abolished them and supplanted them with a new regime entirely …

The Secretary has not truly waived or modified the provisions in the Education Act authorizing specific and limited forgiveness of student loans. Those provisions remain safely intact in the U.S. Code, where they continue to operate in full force. What the Secretary has actually done is draft a new section of the Education Act from scratch by “waiving” provisions root and branch and then filling the empty space with radically new text.

The majority also argues that the forgiveness plan would violate the major questions doctrine. The cost of the plan is monumental (around a half trillion dollars), Congress has considered and rejected similar loan forgiveness proposals, and while Congress is bitterly divided over student loan forgiveness, the HEROES Act was passed unanimously, strongly indicating that “Congress did not unanimously pass the HEROES Act with such power in mind.”

The dissenting justices argue that

Some 20 years ago, Congress enacted legislation, called the HEROES Act, authorizing the Secretary of Education to provide relief to student-loan borrowers when a national emergency struck. The Secretary’s authority was bounded: He could do only what was “necessary” to alleviate the emergency’s impact on affected borrowers’ ability to repay their student loans. 20 U.S.C. §1098bb(a)(2). But within that bounded area, Congress gave discretion to the Secretary.

Yet the liberal justices don’t even try to make the case that the plan would meet that requirement. For example, they write that the act “requires the Secretary to show that the relief he awards does not go beyond alleviating the economic effects of an emergency on affected borrowers’ ability to repay their loans.” But there is no connection between the relief provided by the plan—$10,000 to $20,000 of loan forgiveness for 98% of all borrowers—and the “economic effects” of the COVID pandemic. Many borrowers did not suffer any economic harm from COVID. As Ilya Somin writes, “for the majority of the more than 40 million borrowers the White House claims would be eligible for forgiveness, the government presented no proof that, as a result of Covid, they were placed ‘in a worse position financially.’ Over 80% of employed college graduates did not even report a decrease in salary during the pandemic.” For these borrowers, there was no economic harm to remedy, and, therefore, even by the liberal justices’ logic, the forgiveness plan was illegal.

By arguing that the emergency justified a complete, boundless revision of student loans at the sole discretion of the Secretary, the liberal justices acknowledge no limit to what the Biden administration could have done.

The conservative reading is clearly more convincing, and we should be grateful they prevailed. However, due to the continued difficulties conservatives will have in establishing standing, I fear this is at best a temporary victory. The Biden administration has already announced a new regulatory effort to implement mass student loan forgiveness, this time using clauses in the Higher Education Act rather than the HEROES Act. The good news is that this effort is almost certainly dead on arrival. This case has established that MOHELA, and therefore Missouri, has standing to sue when the new program is announced. The fight over the merits will depend on the plan’s final details, still many months away, but it will almost certainly run afoul of the major questions doctrine, just as this version did.

However, for conservatives, the combination of federal government lending and the progressive crusade to forgive all that debt is like being forced to play Russian roulette over and over again. Progressives will continue to throw anything and everything at the wall, hoping something sticks. And if there is a more permissive statute somewhere, or a change in the balance of the Supreme Court, it’s only a matter of time before something does stick. For conservatives, the only long-term solution to this problem is to get the government out of the business of making student loans.

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