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The Lawsuit to End SAVE Shouldn’t Worry Borrowers

A new lawsuit has the potential to increase monthly student loan bills for millions of borrowers, but the odds of eliminating SAVE seem remote.

Written By: Michael P. Lux, Esq.

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After the Supreme Court struck down Biden’s one-time plan to forgive up to $20,000 per federal student loan borrower, a recent lawsuit has many borrowers and student loan advocates concerned that the new SAVE repayment plan might face the same fate.

Although headlines make the lawsuits appear similar, key differences suggest that this particular lawsuit will be unsuccessful.

A Note from the Sherpa: In this article, I’m going to explain why I think borrowers will be happy with the eventual outcome of this lawsuit. Before jumping into the analysis, however, there are a couple of thoughts I should share.

First, any lawyer will tell you that anything can happen in litigation. Cases can take unexpected turns that result in surprising outcomes.

Second, while I’ve tried to remain objective in my analysis, I should acknowledge my own bias. I’ve dedicated my career to helping student loan borrowers; I don’t want to see anyone hurt by this litigation. Furthermore, I’m currently on the SAVE repayment plan, so I have a personal stake in this case.

The Kansas Lawsuit Basics

Kansas leads a group of 11 states asking the courts to block the SAVE repayment plan and its early forgiveness provisions.

The suing states claim that the Department of Education has overstepped its authority. In their arguments, they rely heavily on the Supreme Court’s analysis in Biden v. Nebraska – the case that ended the one-time forgiveness plan.

Ending the SAVE program would obviously be bad news for borrowers, but there are several reasons to believe that SAVE will survive this judicial challenge.

The Case Should be Dismissed for Lack of Standing

Legal standing refers to a plaintiff’s right to bring a case before a court. One of the basic tenets of this concept is that the party bringing a case generally has to be harmed in some manner by the defendant.

Notably, a benefit going to a third party usually doesn’t provide a basis for giving standing to the plaintiff. For instance, Texas can’t sue the federal government because they used tax dollars to build a bridge in Minnesota, just as a tire repair shop can’t sue the city merely because they fixed a pothole in the street.

The PSLF Argument for Standing

In this case, the states argue that they have standing because they are PSLF employers and the new SAVE plan makes PSLF less appealing because some borrowers will get forgiveness after 10 years without needing SAVE.

This particular argument is weak. Factually, one could argue that the new SAVE plan makes PSLF more appealing not less appealing. Qualifying for lower monthly payments makes working a government job more affordable and increases the amount of potential forgiveness. This should help, not hurt, the states when competing for qualified employees.

Notably, this is the exact argument raised by the Cato Institute when they challenged the SAVE plan and one-time account adjustment last year. The judge in that case ruled that Cato didn’t have standing and dismissed the case. Cato’s appeal is pending in the 6th Circuit.

Loss of Tax Revenue

Kansas and the other states also argue that they have standing because they will lose tax revenue due to SAVE.

This standing argument is particularly weak on a factual basis. The plaintiffs argue that their states follow federal tax treatment of forgiven debt, and because IDR forgiveness is currently not taxed until 2026, they will lose out on tax dollars due to some borrowers having accelerated forgiveness.

For starters, each state controls their own tax laws. They could easily charge state taxes on the forgiveness if they chose to do so.

Secondly, because SAVE would lead to more forgiven debt due to lower monthly payments, the tax revenue in the future would be larger, not smaller. If more borrowers were required to repay their balance in full as the lawsuit calls for, there would be less tax revenue to collect on loan forgiveness.

Increased Fraud

Finally, the states claim that the new SAVE plan will lead to increased fraud and require increased policing from the individual states. They argue that “by chumming the waters with hundreds of billions of dollars in free money, the Department will attract enormous amounts of scammers.”

This argument likewise fails under the slightest bit of scrutiny. 

First, the Department of Education isn’t chumming the waters with hundreds of billions in free money. They are forgiving existing debt. It’s hard to imagine how a scammer could actually collect any money from the government due to SAVE.

Second, SAVE is a tweak to existing federal repayment plans. While the monthly payment and forgiveness timelines might be slightly different, it is hard to imagine how adjusting the terms changes the role of state law enforcement agencies in any way.

Finally, if the court were to accept this argument from the states, it would mean that the mere potential for abuse would give rise to a challenge of any federal spending from any state or locality. Courts won’t want to open that door.

The Key Standing Difference

When the Supreme Court heard the one-time forgiveness case, there were actually two lawsuits. One was from a couple of impacted borrowers and the other was from a group of states.

In a 9-0 decision, the Supreme Court dismissed the case from the pair of borrowers because they lacked standing.

The case from the states was allowed to move forward because of the relationship between Mohela and the state of Missouri. Mohela was created by the state of Missouri in 1981 and is considered a quasi-governmental entity. The Supreme Court found that connection between Mohela and MIssouri was enough to meet the standing requirement.

This time around, Missouri is not a party to the lawsuit, so the impact on servicers doesn’t help the plaintiff’s standing argument.

Clear Congressional Authority

Another way in which this case is much different than the one-time forgiveness case is the legislative authority issue.

Put simply, the President and executive branch agencies like the Department of Education cannot do whatever they want. However, authority can be given by Congress to take certain actions or to spend money.

In the one-time forgiveness case, the Supreme Court ruled that Biden didn’t have Congressional authority to offer the one-time forgiveness of up to $20,000 per borrower. Attorneys for the Department of Education argued they were allowed to forgive the debt thanks to post-9/11 legislation created to give the President the ability to provide some relief in a disaster. The disaster they cited was the Covid-19 pandemic.

This time, the Department of Education is relying on a 1993 modification to the Higher Education Act that requires the department to create “an income contingent repayment plan, with varying annual repayment amounts based on the income of the borrower, paid over an extended period of time prescribed by the Secretary, not to exceed 25 years.” 20 U.S.C. § 1087e(d)(1)(D)

It’s worth noting that this exact authority was used to create both the PAYE plan and the REPAYE plan.

The Big Request from the States

There is another unusual aspect in this case. This lawsuit aims to terminate an existing program, unlike earlier lawsuits which sought to block potential future new rules.

Billions of dollars have already been forgiven though SAVE. The Plaintiffs’ request for relief makes no reference to these loans. Are they suggesting that this forgiveness should be undone? Doing so would be both a logistical and legal nightmare, and not something a court would want to do.

Why Would 11 States Bring Such a Weak Lawsuit?

In certain circles, bashing student loan borrowers and higher education in general is good politics.

The politicians behind this lawsuit will receive a tremendous amount of press and attention for filing the lawsuit.

Should the Lawsuit Influence Your Repayment Strategy?

Probably not.

The lawsuit shouldn’t impact the one-time adjustment, fresh start, or many of the other programs recently put into place.

Even if the lawsuit were successful, borrowers on SAVE would likely revert back to REPAYE, which was replaced by the SAVE plan. The old terms of REPAYE were not as generous as SAVE, but REPAYE did have an interest subsidy, and it did offer lower payments than most other repayment plans.

What is the most likely outcome of this lawsuit?

It gets dismissed for lack of standing.

A few politicians will get their time in the spotlight and argue that they are doing it to prevent wasting tax dollars, which is an ironic position considering that the weak lawsuit is almost certainly a waste of the tax dollars in their respective states.

The challenge in predicting the ultimate outcome of this case is that it is a politically charged issue, and that can lead to some weird outcomes, especially at the trial court level.

What’s next for the lawsuit?

Now that a complaint has been filed, the government will respond.

Expect the response to mention the 1993 authority to create IDR plans and to argue that the plaintiffs lack standing.

We should also expect that a motion to dismiss will be filed for lack of standing as well.

One item to watch closely is whether or not the court issues any sort of injunction. If the court pauses SAVE while the lawsuit is pending, it would be a setback for borrowers. For millions, it could mean higher monthly payments. If the court does not issue an injunction, it is likely a sign that the court doesn’t think the plaintiffs (the states) are likely to be successful.

Likewise, it is worth keeping an eye on Mohela, the Department of Education, and Missouri. Missouri has a standing argument that the other states lack. Missouri filing a lawsuit wouldn’t necessarily end SAVE as most of the same arguments still apply, but it would represent a bigger threat to SAVE.

About the Author

Student loan expert Michael Lux is a licensed attorney and the founder of The Student Loan Sherpa. He has helped borrowers navigate life with student debt since 2013.

Insight from Michael has been featured in US News & World Report, Forbes, The Wall Street Journal, and numerous other online and print publications.

Michael is available for speaking engagements and to respond to press inquiries.

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