Biden administration ordered servicers to cancel student loans in secret, lawsuit alleges

Missouri and six other states have filed a lawsuit seeking to block the Biden administration from implementing its latest student loan forgiveness proposal. While the administration has signaled its intention to cancel about $147 billion in loans for certain groups of student loan borrowers, it has not yet finalized regulations authorizing such forgiveness, meaning potential plaintiffs would not be able to sue to block it.

However, states now have documents showing that the administration plans to begin forgiving the loans this week, even though the forgiveness plan doesn’t technically exist yet. That would allow the administration to get the loans forgiven before federal courts step in to stop it — as previous cases have almost certainly shown.

Biden’s Latest Loan Forgiveness Plan

After the Supreme Court blocked the Biden administration’s first attempt at mass loan forgiveness, the president vowed to try again. In April, the Education Department released a draft of what many see as a successor policy to the first forgiveness program. However, the replacement plan targeted loan forgiveness at different groups of borrowers and relied on an alternative legal theory to justify why the administration could bypass Congress.

The April announcement was only a proposed rule. Federal agencies are required to solicit public comment on proposed rules, then revise and finalize them months later. The proposed rule would have canceled the debt of several distinct groups of borrowers: those who had accrued significant interest, those in long-term repayment, those who attended low-quality colleges and those who might qualify for other loan forgiveness programs. The Education Department has estimated the cost of the rule at $147 billion.

The final rule could differ from the April proposal and could theoretically include changes that would affect its legality. For that reason, outside groups generally cannot sue to block federal regulations until they are finalized. The states’ latest lawsuit is an exception, due to a surprising discovery described in the pages of their complaint.

Service companies instructed to secretly prepare debt cancellation

According to the complaint, the states have “obtained documents demonstrating that the Secretary has been implementing this plan without publication and has planned to do so since May.” In late May, the administration sent documents to student loan companies “directing the companies to begin canceling loan balances as early as September 3.”

The Department of Education, among other things, asked lenders to “report all loan balances between September 2 and 5 and to correct any errors by September 6.” After receiving these loan balances from lenders, the department planned to send them “loan forgiveness packages,” which were to be processed “immediately upon receipt.”

“Thus, if a loan servicing organization reports a set of balances to the Department on September 2 without errors or if the errors are resolved by then, the loan servicing organizations will be required to ‘immediately’ cancel the loans as early as September 3,” the lawsuit alleges. “If the loan servicing organizations take the full allotted time to resolve the errors – until September 6 – then ‘immediate’ cancellation will begin as early as September 7.”

The Education Department also drafted emails that servicers would send to borrowers after canceling those debts. Those emails would credit “the Biden-Harris administration” for the debt cancellation.

“Through the cloak and sword”

The lawsuit paints a picture of an administration that knows its loan forgiveness plans are illegal and would not survive judicial review. To get around this problem, officials planned to begin canceling debts in secret, before (or almost immediately after) the release of their official loan forgiveness plan. This timetable would leave little or no opportunity for lawsuits to block loan forgiveness.

There are good reasons to believe that this latest plan would not stand up to legal scrutiny. The administration’s previous attempt at mass student loan forgiveness failed after a Supreme Court ruling. An even more costly student loan relief program, the SAVE plan, is currently stalled pending a final decision by the federal courts. The legal record is clear: Massive loan forgiveness requires an act of Congress.

The states are making no secret of their views on the administration’s legal shenanigans: “Through secrecy and sword, the Department has thus finalized a rule with a rollout plan that is designed at most to forgive tens or hundreds of billions of dollars without any judicial oversight and is designed to boost the incumbent Democratic presidential candidate two months before the election.”

The plaintiffs asked the court to issue a preliminary ruling on their lawsuit by Friday.