Whether student debtors will get the loan relief promised by President Joe Biden is now in the hands of a federal judge in Missouri.
For nearly two hours on Wednesday, the lawyers for the six states defying The plan to forgive nearly $500 billion in student debt has been sparring with Justice Department lawyers over which laws should govern the decision.
At the end of the hearing in St. Louis, U.S. District Judge Henry Autrey did not issue a ruling on the states’ request for a temporary restraining order to block the program. He also didn’t say when he would make a decision.
Autrey peppered both parties with questions during the hearing. For example, he focused on whether states suing the debt have the right to bring the case.
“It’s hard to make a cake if you don’t have a mold to put that cake on,” Autrey said. “This pan is standing. It doesn’t matter if you have all the ingredients.
The lawsuit was filed by attorneys general from Missouri, Nebraska, Arkansas, Iowa, Kansas and South Carolina. It names Biden, Education Secretary Miguel Cardona and the Department of Education as defendants.
Biden August 24 announced that people who are still paying direct federal student loan debt would receive a rebate on up to $20,000 of the outstanding balance. Every borrower with an income of $125,000 or less — $250,000 for married couples — in 2020 or 2021 will have their debt forgiven by $10,000.
Borrowers who also received Pell grants while in school will have their debt forgiven by $20,000.
During the hearing, attorneys for both sides said it would eliminate about $500 million of the $1.6 billion in outstanding federal student loan debt.
The lawsuit asserts that each of the prosecuting states will be harmed by the action, either through loss of tax revenue on canceled debt or indirectly through loss of revenue from agencies such as the Missouri Higher Education Loan Authority or MOHELA. Each of the states uses the same figure for taxable income as shown on federal forms, and student debt is not treated like other canceled loans, which must be reported as income for tax purposes.
MOHELA was founded in 1981 to help fund student loans issued by banks. In its early years, it sold bonds and bought debt from banks, then used the payments to pay off the bonds. Through numerous changes in federal loan rules, it became a major debt servicer, acting as a collection agent for loans made directly by the federal treasury.
As of June 30, MOHELA managed 5.2 million federal student loan accounts nationwide and serviced $168.1 billion in debt. It doubled the number of federal loans in process over the past fiscal year and added 1,000 employees and contract workers, according to its latest annual report.
Student loan relief cuts service revenue for debtors who see their entire loan forgiven, Nebraska Solicitor General James Campbell said Wednesday.
“The money they lose because of servicing these loans, there’s no way to get that money back,” he said.
In its response to the lawsuit, the federal government argues that agencies like MOHELA are not guaranteed any particular level of revenue from this work.
Missouri cannot sue in MOHELA’s name because the statute that establishes it allows it to sue and be sued in its own name, said Brian Netter, assistant deputy attorney general. He noted that the information about MOHELA included in the States lawsuit was obtained through a Sunshine Law request to the agency, not the agency that proposed it.
“We think there are a lot of indications here that if MOHELA has an injury, that MOHELA could be a plaintiff,” Netter said.
MOHELA did not respond to an inquiry by The Independent into the lawsuit.
The possibility of states losing tax revenue isn’t enough to sustain the lawsuit, Netter added. They are free to change their definition of income.
“States are free to choose to tax these materials as they see fit,” he said.
The main dispute Autrey must resolve is which law should control the decision to grant debt relief.
The states argue that debt relief regulations go beyond the power granted by the HEROES Act and should instead be governed by the Administrative Procedures Actwhich provides for comment periods and requires agencies to justify their decisions in light of these comments.
The HEROES Act cannot be stretched as far as the Biden administration wants, Campbell said.
“The federal government is operating in a covert, ever-evolving and increasingly crumbling escapade of anarchy,” Campbell said.
A long comment period would have defeated the purpose of debt relief, Netter said. The goal, he added, is to help people before a COVID-19 break in refunds ends on December 31.
The HEROES Act gives the U.S. Secretary of Education broad authority to act in ways that prevent economic harm resulting from this emergency, he said.
Just as emergency relief for hurricane victims is not limited to actions “while the hurricane turns,” Netter said, debt relief is intended to alleviate economic damage still resulting from the pandemic.
“The effects must have been caused by the national emergency and relief must be designed to address that damage,” Netter said. “The fact that pandemic conditions seem to be improving now is neither here nor there.”