Libertarian group files lawsuit to block student debt cancellation

Pacific Legal Foundation claims student debt cancellation is an illegal overreach that would increase tax burdens

A libertarian group in California filed a legal challenge to President Joe Biden’s plan for student debt cancelation on Tuesday, calling it an illegal overreach that would increase state tax burdens for some Americans who get their debt forgiven.

The lawsuit, believed to be the first targeting Biden’s plan, was filed by the Pacific Legal Foundation, a Sacramento law firm. It was filed in federal court in Indiana, one of several states that plan to tax any student debt canceled by Biden’s plan.

"Congress did not authorize the executive branch to unilaterally cancel student debt," said Caleb Kruckenberg, an attorney at Pacific Legal Foundation. He said it’s illegal for the executive branch to create the policy "by press release, and without statutory authority."

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The suit’s plaintiff is Frank Garrison, described as a public interest attorney who lives in Indiana and is employed by the libertarian group.

Garrison is on track to get his student debt erased through a separate federal program for public servants. Although most borrowers will need to apply for Biden’s plan, Garrison and many others in that program will automatically get the relief because the Education Department has their income information on file.

Pictured: President Joe Biden after speaking at a White House Competition Council meeting on Sept. 26, 2022.

Pictured: President Joe Biden after speaking at a White House Competition Council meeting on Sept. 26, 2022. (AP Photo/Susan Walsh)

Biden’s plan would automatically cancel $20,000 of Garrison’s debt, which in turn would trigger an "immediate tax liability" from the state of Indiana, according to the suit. Under the debt forgiveness program he’s enrolled in now, canceled debt cannot be taxed.

"Mr. Garrison and millions of others similarly situated in the six relevant states will receive no additional benefit from the cancelation — just a one-time additional penalty," the suit argues.

Any student debt forgiven under Biden’s plan would also be subject to state taxes in Arkansas, California, Minnesota, Mississippi, North Carolina and Wisconsin, unless lawmakers in those states change their current laws.

Biden’s plan promises to cancel $10,000 in federal student debt for borrowers with incomes of less than $125,000 per year or households making less than $250,000. Those who received federal Pell Grants to attend college would get an additional $10,000 erased.

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An application to receive the benefit is expected by early October.

Conservative groups have been threatening to challenge debt cancelation since Biden first aired the idea, saying it’s legally questionable and unfairly cancels student debt at the expense of Americans who didn’t attend college. One of the main challenges has been finding someone who faces personal harm as a result of Biden’s plan, giving them legal standing to sue.

The Biden administration did not immediately comment on the suit but has argued that the plan is on solid legal ground.

In its legal justification for debt cancelation, the Biden administration invoked the HEROES Act of 2003, which aimed to provide help to members of the military. The law gives the administration "sweeping authority" to reduce or eliminate student debt during a national emergency, the Justice Department said in an August legal opinion.

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Education Secretary Miguel Cardona has said he has the legal authority to cancel debt for people who faced hardship during the pandemic. Cardona says Biden’s plan will ensure borrowers aren’t worse off after the pandemic than they were before.

The suit challenges that rationale, saying Garrison and others will see their debt burdens increase as a result of Biden’s plan. It also contends that the plan doesn’t meet the requirements of the 2003 law, arguing that the problem of high student debt is not a "direct result" of the pandemic.

"Nothing about loan cancelation is lawful or appropriate," the suit alleges. "In an end-run around Congress, the administration threatens to enact a profound and transformational policy that will have untold economic impacts."

The suit asks the court to overturn Biden’s plan and to temporarily halt it while legal questions are resolved.