Why There Is A Chance That The Supreme Court Could Uphold Student Loan Forgiveness

Any day now, the Supreme Court will issue its decision on whether President Joe Biden has the authority to cancel $10,000 in federal student loans and $20,000 for those who had Pell grants. While many believe that the Supreme Court would strike it down, recent developments may suggest that the Court might be open to ruling for forgiveness.

Recent Ruling

A week ago, the Supreme Court decided Haaland v. Brackeen, a case that involved Texas challenging the federal Indian Child Welfare Act. As part of the decision, the 7-2 majority stated that Texas does not have standing to sue on behalf of its citizens on an equal protection claim. Also, it stated that a direct pocketbook injury is not enough to establish standing if the injury is not fairly traceable to the unlawful conduct.

In this case, six states, including Missouri, sued to block the Department of Education’s loan forgiveness proposal. During oral arguments, the solicitor general, arguing for the department, stated that the Missouri Higher Education Loan Authority (MOHELA) would be the proper plaintiff to challenge the proposal. Also, as I stated earlier, the state plaintiffs’ pocketbook injury of lost future interest payments would not be fairly traceable to the loan forgiveness proposal since the states are not entitled to the fully amortized interest payments. States can lose future interest payments if debtors opt to pay earlier or refinance with a different lender.

The Court could follow the reasoning in Haaland to dismiss the case for lack of standing. But it is possible that the Court will distinguish this case and allow the plaintiffs to sue, especially considering the estimated $400 billion cost to taxpayers. If the case is dismissed, it opens the door for Biden to issue another student loan forgiveness proposal at any time. As the state of emergency is now over, he cannot rely on the HEROES Act. But he might rely on the compromise provisions stated in the Higher Education Act.

Assuming the right plaintiffs come along the next time around, the Court could revisit the standing issue. Missouri can pass legislation that could allow the government to have greater control over MOHELA. This is likely to be the case as MOHELA’s internal emails show that their employees did not want to be part of the lawsuit.

Loan Forgiveness As Consolation Prize?

The Supreme Court has not yet decided on the legality of affirmative action, which currently allows universities to use race as a factor in deciding whether to admit a student. Commentators have stated that the Court’s conservative majority will either strike it down or place more limits on how it can be applied in university admission evaluations. This would anger liberals and progressives.

To possibly placate the situation, the Court could issue both decisions simultaneously upholding loan forgiveness while striking down affirmative action.

Invoking Major Questions Doctrine

The plaintiffs request the Court to invoke the major questions doctrine (MQD) to strike down the loan forgiveness program. The MQD means that courts should not give deference to agency determinations that involve matters of major political or economic significance.

This doctrine was first used almost 20 years ago in the case of FDA v. Brown and Williams Tobacco Corp. Although the MQD rarely has been invoked since, it has made a comeback in recent years. The Court invoked it three times in its shadow docket and in West Virginia v. EPA decided in 2022.

Looking at various statistics, it is fair to say there is mixed support for loan forgiveness. While loan forgiveness may appear to be a political issue, most will respond based on self-interest. Most people with loans will support forgiveness while those who didn’t go to college or paid off their loans will not. Although some will magnanimously say on social media that they support loan forgiveness even though they paid off their loans, they are in the minority, assuming these people are telling the truth.

The hardcore tribalists will vote for their party regardless of the outcome. But for some, this may be the issue that decides how they vote. If they missed out on $10,000 (or $20,000) in forgiveness because they paid their loans on time, they might remember this when they vote in 2024, assuming a reasonable Republican is running for office. But if loan forgiveness is struck down, a Democrat-leaning voter likely won’t switch parties.

So while the issue has become political, the current justices might not think it is significant enough since upholding loan forgiveness is more likely to hurt Biden and the Democrats in the 2024 elections.

As for the economics of the plan, the $400 billion cost to taxpayers cannot be ignored. But it is important to note that many recent graduates are in income-based repayment programs and for many of this group, forgiving $10,000 or $20,000 will have a negligible effect on their six-figure balances. Therefore, a good portion of that amount would have been forgiven anyway after the end of the statutory repayment period. So the actual cost is likely to be much smaller than the estimated amount stated above and may not be significant enough for the Court to invoke MQD.

On the other hand, if a future president plans to propose a larger forgiveness amount or totally wipe out the total $1.7 trillion student loan debt, the cost might be too large for the Court to ignore and will require clear, congressional approval.

Lastly, the Court needs to articulate limits on when it will use MQD. Or plaintiffs will attach it to every argument challenging an executive or agency action and the judiciary risks entering a second Lochner Era.

So keep your fingers crossed, as the Supreme Court could give debtors a debt jubilee. But the Court will eventually require clear congressional approval if this happens again.

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Steven Chung is a tax attorney in Los Angeles, California. He helps people with basic tax planning and resolve tax disputes. He is also sympathetic to people with large student loans. He can be reached via email at [email protected]. Or you can connect with him on Twitter (@stevenchung) and connect with him on LinkedIn.