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Washington Watch: Student loan forgiveness: Republican opposition will face an ‘uphill slog’ in courts, experts say

The debate over whether President Biden can and should cancel trillions in student loan debt is heating up, now that his legislative agenda appears to be losing steam.

Congressional Republicans are already lining up to oppose any further action to relieve borrowers of federally-backed student debt, with Rep. Virginia Foxx of North Carolina, the ranking republican on the House Education and Labor Committee issuing a statement last month lamenting the impact of the current collections freeze on the budget deficit.

She said that Biden’s third extension of the collection freeze — enacted in December and expiring in May — will cost taxpayers $150 million and urged Biden to present a plan “that will address challenges facing student loan servicing companies and borrower confusion, and provide a clear timeline for when student loan payments will resume.”

But Republicans in Congress may be powerless to stop the Biden administration if it decides to use the Secretary of Education’s broad authority to waive student debt obligations that are owned by the federal government. According to an analysis by Wilson Freeman, former attorney advisor to the Congressional Research Service, federal courts “have generally…been less willing to permit individual legislators to seek redress for injuries to a house of Congress as a whole, at least in the absence of explicit authorization to do so from the legislative body itself.”

Harvard University’s Howell Jackson, agreed in an interview with MarketWatch that it’s typically an “uphill slog” for members of Congress to attain the necessary standing to block executive actions in federal courts, especially in today’s case where Democrats, many of whom are supportive of debt cancellation, control both houses of Congress.

Jackson said that instead, the “most plausible party to be granted standing in the courts are those with an economic interest in the program as currently structured,” namely, servicing companies that manage student-loan payments in exchange for a per-borrower fee.

These companies, like the Oklahoma Student Loan Authority and the Missouri Higher Education Loan Authority, are sometimes quasi-governmental entities originally chartered by individual states, but which have grown to have national footprints. Others, like Nelnet, Inc.
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are publicly traded, private entities.

These companies service the nearly $1.4 trillion in Federal Direct Loans held by the government, which accounts for the vast majority of the Department of Education’s roughly $1.7 trillion student loan portfolio.

Scott Buchanan, executive director of the Student Loan Servicing Alliance, an industry group, says however that servicing companies would be unlikely to sue the Department of Education, which ranks as many of these firm’s largest client.

“Our approach has always been that this is a partnership and the government’s a client,’ he said. “As long as the education department recognizes that if they want to keep someone managing the loans they have left, they’re going to have to pay appropriate compensation for it. It would alter scale. We would have to fire people, but the business would adapt. And the work would grow back again quickly because untargeted forgiveness wouldn’t address future students’ need to continue to borrow new loans.”

Indeed, one of the criticisms of a blanket forgiveness of student loan debt is that it would do nothing to help students who are about to take out loans to go to school. Student loan servicers will want the business that these prospective borrowers will bring, Buchanan said, and suing the Department of Education would not be good for servicers in the long run.

The question becomes more complicated with respect to two other major student lending programs: Perkins loans and the Federal Family Education Loan program, according to David Bergeron, who spent 35 years at the Department of Education and rose to serve as acting assistant secretary for postsecondary education under President Obama.

There are more than $200 billion in outstanding loans for these now defunct lending programs, and canceling them would inflict losses on banks and education institutions that provided funds for these loans.

“At this point, the pause in collections is not a big fiscal hit for these institutions, because they still hold the asset,” he said. “But if you cancel hundreds of billions of dollars, how do you make the lenders whole? You have to get money to the lenders otherwise there’s a takings problem under the Constitution,” which bars the government from taking private assets without just compensation.

Advocates for administrative relief argue that the statues that authorized these programs provided for mandatory funding, including payments to parties who issued loans guaranteed by the federal governnment

High profile Democrats, including Sens. Elizabeth Warren of Massachusetts and Senate Majority Leader Chuck Schumer of New York have vocally promoted administrative debt cancelation of up to $50,000 in debt per borrower, and have expressed confidence that the move cannot be overturned by the courts.

To be sure, Biden himself is not yet onboard with administrative cancelation of student loans. He has said he would prefer that Congress authorize the forgiveness of $10,000 in debt per student. Earlier this year, White House officials said they were reviewing Biden’s legal authority to cancel student debt through executive action.

But Congressional Democrats and liberal activists groups have kept up the pressure on the president to change his mind, and with no chance of an evenly split Congress passing forgiveness through legislation, analysts believe that Biden may resort to debt relief as a tool for motivating his base ahead of what is expected to be a difficult midterm election for Democrats.

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