MOHELA’s role in lawsuit blocking student loan debt has ‘startling implications’: Biden

  • The Biden administration submitted its full legal defense of its student debt relief plan to the Supreme Court.
  • Student loan company MOHELA is at the center of the lawsuit filed by six GOP-led states.
  • The DOJ said ruling in favor of the states’ argument could set a strange legal precedent.

A Missouri-based student loan company has found itself at the center of a lawsuit blocking student loan forgiveness — and President Joe Biden’s administration said its role could set a strange legal precedent going forward.

It’s a critical year for millions of student loan borrowers as Biden’s plan to cancel up to $20,000 in student debt will have its day in the Supreme Court on February 28. For over two months, the implementation of the relief has been blocked due to two lawsuits against the administration. One was filed by two student loan borrowers who did not qualify for the full $20,000, and another by six Republican-led states that said the relief would hurt their states’ tax revenue, along with student loan company MOHELA. .

Although the administration has pushed back on the arguments in both cases, arguing that neither has standing to sue, the latter — involving MOHELA — is complicated, given that the company itself denied involvement in the case in November after the 8th Circuit ruling which blocked the relief.

Adding to this complexity, the Justice Department wrote in a legal filing Wednesday night that upholding the 8th Circuit’s ruling would mean that “banks can sue anyone who causes financial harm to their borrowers, credit card companies can sue anyone who causes financial harm to their customers, and governments can sue anyone who causes financial harm to their taxpayers.”

Dalié Jiménez, a law professor at the University of California Irvine and director of the Student Loan Law Initiative, told Insider that Biden’s legal defense “did a very good job of saying that if A causes financial harm to B, and B owes money to C, then C sue… and that’s nonsense.”

She added that the states’ position is dubious, and she is concerned about the legal precedent it would set if the Supreme Court were to rule in their favor.

“I think this is an important issue,” Jiménez said. “I’m a little afraid of what’s going to happen more for the larger implications of what the Supreme Court does, what its purpose is, and its role and legitimacy.

Favoring the GOP-led states’ cause has ‘startling implications’

Since the lawsuit arose, Biden’s Justice Department has argued that MOHELA is a separate entity from the state and can sue and be sued on its own, and the department responded to the states’ claim that the relief would cause MOHELA to stop receiving service fees, which would impair the company’s “ability to to fulfill their statutory obligation to contribute a specified amount to the treasury”.

“However, the states have never alleged that the plan would cause MOHELA to default on its obligations to the state,” the Justice Department wrote. “And it is pure speculation that if the plan leads to a reduction in MOHELA’s income, MOHELA will respond by defaulting on its obligations rather than, say, cutting its other expenses.”

Steve Vladeck, a professor at the University of Texas School of Law, said during a press conference Wednesday that any case filed in federal court must demonstrate that the plaintiff would be harmed by the policy, that the harm can be traced directly back to the defendant, and that the relief they seek will resolve these damages.

But the damages MOHELA may suffer are unknown, and “Missouri itself is not directly harmed, and … the indirect harm Missouri suffers through the damage to MOHELA is speculative at best,” Vladeck said.

And, as the Justice Department wrote in its filing, four of the states — Iowa, Kansas, Nebraska and South Carolina — said the debt relief would also hurt their tax revenues because state tax rules chose to include debt relief as gross income, even though federal law prevents debt relief from being taxed through 2025.

“Any damage to state treasuries here is likewise self-inflicted,” the filing said, adding that “any resulting reduction in their tax revenues is quite traceable, not to the secretary’s plan, but instead to their own choices about how to structure their tax revenue. tax laws.”

Should the Supreme Court rule in favor of the states, it would have “startling implications”, the submission states.

“Almost every federal action — from prosecuting crime to imposing taxes to administering property — has some incidental effect on state finances,” it said. “If such random effects are sufficient to stand, each state would have standing to challenge almost any federal policy.”

While Biden’s education department extended the pause on student loan payments to 60 days after June 30 or when the lawsuits are resolved — whichever comes first — Jiménez said that if the Supreme Court ends up striking down the debt plateaus, it’s important that the administration find another way to deliver student loan forgiveness before payments resume.

“I think that even if they end up holding this particular cancellation program to not be right, that there are other ways that the administration can do this and should do this,” she said.

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