Student loans

What does a legal challenge to student loan forgiveness mean for borrowers?

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A lawyer working for a conservative legal group this week brought the first legal challenge to President Joe Biden’s sweeping plan to cancel up to $20,000 in student debt for millions of Americans.

“Nothing about loan cancellation is legal or proper,” Frank Garrisonlawyer at the Pacific Legal Foundation, said in a complaint filed in the U.S. District Court for the Southern District of Indiana.

“In a tailspin around Congress, the administration is threatening to enact deep, transformational policy that will have untold economic impacts,” the complaint continues. “The lawless action of the administration must be stopped immediately.”

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The main hurdle for those hoping to take legal action against Biden’s plan has been finding a plaintiff who can prove they were wronged by the policy.

“Such an injury is necessary to establish what the courts call ‘standing,'” said Laurence TribeHarvard law professor.

Garrison says he could be harmed by Biden’s loan forgiveness in the form of a tax bill. Canceled student debt may be considered taxable income.

Although borrowers won’t be required to pay federal taxes on their canceled student debt, thanks to a pandemic-era relief provision in the 2021 U.S. bailout, some states – including Indiana, where Garrison resides – may impose relief levies. Currently, Garrison is pursuing a government program that leads to tax-free debt forgiveness, known as public service loan forgiveness, but he says Biden’s plan could now get him a bill. tax of $1,000.

Here’s what development means for borrowers.

What is the probability that this challenge will be successful?

Not too likely, said higher education expert Mark Kantrowitz.

Because people with federal student debt can refuse forgiveness, it will be difficult for Garrison to prove he will be harmed, Kantrowitz said.

A White House spokesman, Abdullah Hasan, agreed.

“The request is baseless for one simple reason: no one will be forced to get debt relief,” Hasan said. “Anyone who doesn’t want debt relief can opt out.”

Still, some courts might be flexible in their interpretation of “quality,” Kantrowitz said, “if they want to take the case.”

“It will be interesting to see how this and other cases unfold,” he said.

Could there be other legal challenges to Biden’s plan?

Yes.

GOP attorneys general from states such as Arizona, Missouri and Texas, as well as Sen. Ted Cruz, R-Texas, and those linked to the conservative think tank The Heritage Foundation, are said to be considering their options when they s is trying to block loan forgiveness.

“In the meantime, the uncertainty for borrowers is, I fear, considerable,” Tribe said.

What does this mean for borrowers?

If you have federal student loans, you should apply for forgiveness as soon as the US Department of Education application goes live. The government says this form will be ready by “beginning of October.”

Waiting, borrowers can sign for updates on the application process.

If you get your loans canceled before a lawsuit gets in your way, you could retain the relief, Kantrowitz said, “even if the courts rule against the Biden administration.”

To be ready to get started when the application launches, check that your income and loans are eligible, and gather documents that may be useful to support your application.