By David Nahmias, Student Loan Justice Fellow | April 29, 2024
The Anti-Borrower states are at it again. After toppling President Biden’s landmark plan to cancel up to $20,000 of student debt for 40+ million Americans—using a highly dubious theory that the plan caused them any harm whatsoever—a group of Republican-led states are now assailing the administration’s latest effort to make repaying student loans easier and more affordable. Attorneys general from 18 states have brought a pair of separate but nearly identical lawsuits that threaten to squash the U.S. Department of Education’s newest and most generous Income-Driven Repayment (IDR) plan, known as the Saving on a Valuable Education (SAVE) plan. If the states succeed, it could throw the already overwhelmed federal student loan system into even more chaos.
How Does SAVE Help Borrowers?
Created by Congress in the 2007 reauthorization of the Higher Education Act and fleshed out by Department of Education regulations, IDR plans allow borrowers of most federal student loans to pay only what they can afford each month based on a percentage of their income. Any remaining loan balances will be wiped away after 20 or 25 years of repayment. Government and nonprofit workers like teachers, nurses, and social workers must enroll in these plans in order to get cancellation through Public Service Loan Forgiveness (PSLF) in 10 years.
The day that the U.S. Supreme Court struck down the Biden Administration’s first broad-based debt cancellation plan, the administration announced its finalized SAVE Plan, which offers the best and often most affordable terms for borrowers among the plethora of repayment options available. The SAVE plan—which replaces and updates the Department’s REPAYE plan—more than doubles the minimum income threshold for borrowers to make a monthly payment, meaning that an individual making less than about $30,600 annually and any borrower in a family of four who makes less than about $62,400 will not have to make any monthly payments at all. SAVE also cuts the amounts that a borrower of undergraduate loans and some married couples must pay. Critically, the plan lowers the repayment term to 10 years for borrowers who originally took out less than $12,000 in loans—meaning that borrowers such as community college graduates with low principals will not be forced to watch their balances grow due just to soaring interest. Finally, SAVE waives any leftover interest after borrowers make their income-based payments, ending the years-long problem of low-income borrowers’ accounts ballooning with interest due to their low monthly payments.
Parts of the SAVE plan are now up and running, with the remaining components to come online on July 1, 2024. Over 360,000 student borrowers have already had their student loans forgiven through SAVE, and millions more will continue to benefit and even see their debts cancelled—meaning that many more are able to buy homess, start businesses and families, and save for retirement.
Who Is Against SAVE?
Not everyone is so enthusiastic about the SAVE plan, however. Two state-led lawsuits are currently underway that seek to stop the Department of Education from implementing the remaining aspects of SAVE and to roll back the regulation. Late last month, 11 states, led by Kansas and its attorney general Kris Kobach (who, coincidentally, led former President Trump’s quixotic investigation to identify massive voter fraud in 2016 along with several anti-immigrant laws and ballot initiatives), filed a legal challenge to the SAVE plan in federal district court. Their lawsuit, Kansas v. Biden, alleges that the Biden administration exceeded its authority under the Higher Education Act when it enacted the SAVE plan and failed to follow the requisite procedures to issue it. What’s more, according to the states, the administration vastly underestimated the cost of the plan. Their lawsuit also claims the Administration encroached on Congress’s authority to relieve student loan debt—despite Congress’s express authorization to the Department to establish IDR regulations that “require payments that vary in relation to the appropriate portion of the annual income of the borrower.”
A few weeks later, seven more states, led by Missouri, filed a separate lawsuit that makes similar grandiose claims of administration overreach, including that the SAVE plan “strike[s] a blow to the Constitution’s very structure and centralize power within the executive alone.”
Is There Actually Any Harm in SAVE?
Before the states can make their substantive legal challenge to the SAVE plan, they will need to show that they have a right to do so in the first place. To proceed with a legal case, a plaintiff must have what is called “standing.” Under well-established Supreme Court law having standing in federal court means having suffered or about to suffer a harm that was caused by the defendant’s actions and can be resolved by a court order. Here, the states offer a number of remarkable assertions that the SAVE plan hurts them or their residents in some way—each of which demands some attention. Without standing, their cases are dead on arrival. Yet, with it, they can proceed to argue the substance of their claims.
In both the Kansas and Missouri cases, the 18 states’ principal argument is a peculiar one rooted in the tax code. During the pandemic, Congress suspended until 2026 a federal tax law that makes the balance of student loans that are cancelled under IDR plans taxable as income for federal purposes. (Cancellation through some programs, such as PSLF, is never taxable as income.) Most states’ tax codes mirror the federal system, so when something isn’t taxable as income at the federal level, it isn’t taxed by states, either. The states say that because enrollment in SAVE will cause some borrowers to have their debts cancelled in the next few years, after 2026 states like Kansas and Nebraska, which base their state tax regime on the federal system, will lose some income tax revenue that they could otherwise collect.
Sounds confusing? It is. This line of argument was already rejected last year during the challenge against broad-based debt cancellation. In that case, the federal court found—and no court addressed thereafter—that “these future lost tax revenues are merely speculative,” and were therefore insufficient to confer standing in federal court. The court also determined that the states were free at any time to change their own laws to uncouple their tax codes from the federal tax system, meaning they can tax cancelled student loans as income even while the tax consequences remain suspended on a federal level. That flexibility to make adjustments further undermines the states’ claim of harm.
More to the point, the states are ignoring the positive income tax consequences of their residents no longer being burdened by debt. Studies show that borrowers’ income, levels of homeownership, and consumer spending increase once their student loan debt is discharged. Because income, homes, and goods are taxed on a state and local level through income, property, and sales taxes, an increase in borrowers’ wealth would presumably cause tax revenue to rise, not fall. In other words, SAVE could help, rather than harm, the plaintiff states.
The states also posit that loan cancellation will reduce the incentives that they as PSLF-eligible employers have to attract and retain talent. By making it possible for some borrowers with low starting loan balances from undergrad to achieve forgiveness within 10 years, the states contend, those borrowers are essentially able to reap the same benefits as those public servants who also work for 10 years at government or non-profit employers and can achieve PSLF. As a result, PSLF would seem “less attractive,” and states would lose their competitive edge in the marketplace for talented public servants… never mind that the states offer no evidence of any competition of this sort among borrowers. Notably, a couple of right-wing think tanks recently trotted out a related similar argument to attack a different student debt initiative, thus far without success (and, as an amicus brief we filed last December observes, also without the requisite showing of harm.)
Finally, the states point to some quasi-state entities that they say may lose revenue due to SAVE-related debt cancellation that would pass onto the state. The most promising for them is based on Missouri’s relationship to the Missouri Higher Education Loan Authority (MOHELA), a private company and student loan servicer created by Missouri law that helps administer the federal student debt portfolio. Last year the Supreme Court ruled in Biden v. Nebraska, the debt cancellation case, that MOHELA and Missouri were sufficiently linked such that a potential loss of servicing revenue to MOHELA due to the debt cancellation could pass onto Missouri. This is despite the evidence that MOHELA was designed to be completely separate and independent from the state of Missouri, had no role in the states’ lawsuit, and might even benefit from debt cancellation. This year, again, Missouri argues that debt cancellation will reduce MOHELA’s servicing revenue.
A common thread across these arguments is that, essentially, benefits to these states’ student loan borrowers are somehow harms to the states themselves. Put differently, these states are actively working to keep their residents in debt, even though, once debt free, these former borrowers would be able to make substantial financial contributions to their local economies and, consequently, to their local tax base.
What comes next for SAVE?
The SAVE plan litigation is actively moving through the courts and likely will pick up speed this summer. Both Kansas and Missouri have asked the court to issue preliminary injunctions halting SAVE before the Department of Education finalizes it on July 1. To obtain court orders at this early stage of the litigation, the states will have to establish that they are likely to win on their legal claims later on, and that they will be “irreparably harmed” unless the court orders the Department to stop implementing the SAVE plan. With hearings in a few weeks in both cases, we anticipate decisions before the end of June.
The states’ twin cases pose a special wrinkle for SAVE. The separate lawsuits were filed in two different judicial circuits, the Tenth Circuit (Kansas) and the Eighth Circuit (Missouri). If the judges both rule the same way, SAVE would be implemented consistently across the country, whether upheld or struck down (unless the likely appeals to the Tenth and Eighth Circuit Courts of Appeal result in different outcomes). On the other hand, if the courts rule in different ways, with one ordering the Department to roll back SAVE and the other allowing it to go forward, the Department will be forced to contend with contradictory court orders. That could throw the IDR program into disarray and, in all likelihood, would practically beg the Supreme Court to weigh in with the final word and resolve the disagreement.
For the first time in almost a decade, the Department of Education is rolling out a new and highly promising IDR plan that will likely benefit millions of borrowers by lowering their monthly balances. The Anti-Borrower states are nevertheless prioritizing narrow political interests rather than broad-based relief that would be life-changing for thousands of their own residents and taxpayers. Borrowers and their allies thus need to stay ready and alert to defend a program that guarantees a lifeline for their economic and social livelihoods.
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David Nahmias is a Student Loan Justice Fellow with SBPC and a staff attorney at the Center for Consumer Law and Economic Justice at UC Berkeley School of Law, where he directs the Consumer Law Advocates, Scholars & Students Network. He previously served as a staff attorney at the Impact Fund focusing on class action, LGBTQ rights, and public benefits-related litigation and advocacy, and as a law clerk for the Hon. Donna M. Ryu of the Northern District of California.