Lawsuit Alleges Department of Education May Imminently Cancel Student Debt
According to a complaint filed by a coalition of state attorneys general (AGs) led by Missouri, the Department of Education is preparing student loan servicers to imminently cancel significant amounts of student debt under a proposed rule that has not yet been finalized.
The complaint alleges that this early action is being taken in an attempt to cancel debt before courts would be given a chance to intervene. This debt cancellation would cost an estimated $147 billion – primarily from canceling accumulated interest on loans that have higher balances than what was initially borrowed. The cancellation could cost far more if the courts rule the Administration’s new income-driven repayment plan (SAVE) – which is currently on hold due to a court-ordered injunction – to be partially or fully illegal.
The preliminary rule, which the AGs are suing to enjoin, consists of several major cancellation provisions that would cancel some or all debt for roughly 30 million borrowers. The major provisions include canceling unpaid interest up to $20,000 (or in some cases without limit) for those whose balances have grown, canceling debt for those who would have been eligible for forgiveness had they entered an income-driven repayment program, canceling debt of borrowers who attended low-value institutions, and canceling debt of loans made at least 20 years ago depending on eligibility. In total, the Department of Education estimates these provisions would cost $147 billion over ten years on a present-value basis (this rule does not include debt cancellation based on hardship, which the Administration says will be released separately).
Cost of Not-Yet-Finalized Debt Cancellation Rule
| Policy | Cost |
|---|---|
| Cancellation of accumulated interest | $73 billion |
| Cancellation of debt for IDR-eligible borrowers who did not apply | $9 billion |
| Cancellation of loans over 20/25 years old | $14 billion |
| Cancellation of debt from low-value institutions | $35 billion |
| Related cancellation from FFEL loans | $17 billion |
| Total Cost of the Rule, on Top of SAVE Plan | $147 billion |
Source: Department of Education.
Importantly, $147 billion may severely underestimate the actual costs because it assumes that the SAVE plan is fully implemented; much of the debt cancelled under this rule would otherwise be cancelled or reduced by SAVE. However, given that SAVE is now on hold after courts ordered injunctions while the lawsuits over its legality make their way through the legal system, the ultimate cost of this rule would be far higher without full implementation of SAVE. (We have asked the Department of Education to estimate how much higher on our comments on their rule.)
The emergency temporary restraining order request, led by Missouri Attorney General Andrew Bailey, alleges to have discovered documents that indicate debt cancellation under this preliminary rule is imminent despite the lack of a final rule. The complaint alleges that in late August, the Department emailed MOHELA, a student loan servicer, instructions to “report balances of all loans to the Department between September 2 and September 5 and to fix any errors by September 6.” The same set of instructions (which are sealed due to the documents consisting of confidential information) purportedly state (emphasis in original) “the Department will submit ‘forgiveness files’ to the contractors, which the contractors are instructed to process ‘immediately upon receipt.’” The lawsuit alleges that a follow-up email stated that “[t]he anticipated completion date” for all debt discharge “will be three business days after delivery of the discharge file.”
The filing argues that the forgiveness could begin as early as between September 3 (yesterday) and that the Department of Education refused to guarantee it would wait at least 30 days after the final rule is published to implement as is typically required with federal regulations or 60 days as required for major regulations by the Congressional Review Act.
These concerns are consistent with ones we expressed in early August after the Department gave borrowers until August 30 to opt out of a plan that has not been published in its final state. We remain concerned that the Administration will aim to cancel debt immediately upon finalizing the rule in order to avoid legal challenges.
Maya MacGuineas, president of the Committee for a Responsible Federal Budget, stated at the time:
The courts have already ruled one of the Administration’s debt cancellation actions to be illegal and put a stay on another one. Trying to slip a third effort past the courts would set a dangerous precedent and could allow the executive branch to spend with impunity. Trying to circumvent Congress and the courts is not the way to govern.
She also noted that we are approaching record debt levels and now is not the time to borrow for a poorly conceived loan cancellation program that would likely be struck down by courts, if they ever get the chance. The Department of Education should publicly commit to follow normal law and precedent and wait at least 30 or 60 days after publishing the final rule – and allowing legal challenges to play out as necessary – to start canceling debt. More fundamentally, the Administration should abandon their efforts to cancel debt by executive fiat and instead work with Congress on a plan to truly improve college quality and affordability.
