First Lawsuit Filed to Block Biden’s Debt Forgiveness

The Pacific Legal Foundation claims that automatic debt cancellation will harm borrowers residing in states that will tax canceled debt as income.
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  • Legal challenges to the president's debt cancellation plan have been expected.
  • The plaintiff in this lawsuit claims that automatic debt forgiveness will harm him because he resides in a state that will tax canceled debt as income.
  • The lawsuit also claims that the president does not have the legal authority to cancel federal student loan debt broadly.

A nonprofit law firm filed what appears to be the first lawsuit attempting to stymie President Joe Biden's student debt relief plan, but the firm's claims already appear shaky.

California-based Pacific Legal Foundation (PLF) filed a suit against the Department of Education (ED) and Education Secretary Miguel Cardona on Tuesday. The plaintiff is a PLF employee named Frank Garrison who claims that Biden's automatic debt forgiveness will harm him because he resides in a state that will tax canceled debt as income.

Biden announced his student loan cancellation plan on Aug. 24. Borrowers making less than $125,000 per year qualify to have up to $10,000 of federal student loan debt erased. Those who received Pell Grants may have up to $20,000 canceled.

According to the lawsuit filed by PLF in the Southern District of Indiana, Garrison will soon qualify for complete debt cancellation through the Public Service Loan Forgiveness (PSLF) program, and that cancellation would not be taxable. But because ED promised to automatically cancel debt for those the department already has income data on, he would be forced to pay over $1,000 in state taxes.

Garrison resides in Indiana, according to the suit. Indiana is one of six states that the nonprofit Tax Foundation listed as likely to tax canceled debt as income.

Biden's administration quickly responded to these concerns.

White House Press Secretary Karine Jean-Pierre said during a Tuesday press briefing that Biden's plan will include an opt-out option. White House spokesperson Abdullah Hasan also stated that the lawsuit was baseless because borrowers who don't want relief may opt out.

Steve Simpson, a senior attorney at PLF, told The New York Times that an opt-out would make Garrison's case more difficult to argue. The case's standing is that the debt relief would harm Garrison, but that would no longer be the case if he could opt out of the program.

The suit asks that the court issue an injunction of Biden's debt forgiveness plan, which would block it from going into effect.

PLF's claims go beyond the argument that debt cancellation would harm Garrison.

The lawsuit claims ED does not have the legal authority to cancel debt broadly through the power of the Higher Education Relief Opportunities for Students Act. PLF argues that the department would have to go through the formal rulemaking process for any such action, which would allow for public input.

"Congress did not authorize the executive branch to unilaterally cancel student debt," Caleb Kruckenberg, an attorney at PLF, said in a statement. "It's flagrantly illegal for the executive branch to create a $500 billion program by press release, and without statutory authority or even the basic notice and comment procedure for new regulations."

The Congressional Budget Office this week said it estimates the cost of debt cancellation will be approximately $400 billion.