Student loan forgiveness could hinge on debt relief's connection to Covid-19

Neither of the two cases argued before the U.S. Supreme Court on Tuesday is guaranteed to settle whether the Biden administration is legally empowered to wipe out hundreds of billions of dollars in federal student loan debt.

The court could sidestep the question altogether if the justices decide that the parties challenging the debt relief plan lack standing, or the right to have their grievances heard.

However, if the court does tackle the scope of the executive branch’s power, its decision could hinge on whether Biden’s debt relief plan, purported to alleviate financial hardships for more than 40 million American student loan borrowers, is actually tied to Covid-19.

That’s because the HEROES Act – a law the administration taps as authority for forgiving student loans – empowers the U.S. Education Secretary to waive or modify laws or regulations concerning federal student loan programs for student loan recipients who “suffer direct economic hardship as a direct result of a war or other military operation or national emergency.”

The law further specifies that the Secretary’s authority is meant to ensure that student loan borrowers experiencing an emergency-caused economic hardship “are not placed in a worse position financially” in relation to those loans.

According to the administration, the Covid-19 pandemic is just the sort of national emergency contemplated by the HEROES Act because it directly caused economic hardship for certain student loan borrowers.

U.S. Solicitor General Elizabeth Pregolar, who argued on behalf of the administration in both cases — Biden v. Nebraska and Department of Education v. Brown — said during Tuesday’s hearings that student loan borrowers in forbearance for long periods, including those who took advantage of Covid-19-related repayment pauses set to expire within months, are more likely to default on payments, particularly those with annual income of less than $125,000.

Chief Justice John Roberts, Justice Elena Kagan, and Justice Amy Coney Barrett questioned whether the pandemic is directly responsible for degrading the indebtedness of all student loan borrowers entitled to forgiveness under the relief plan.

“[I]t seems, you know, a real mixture of COVID and non-COVID-related things,” Justice Kagan said.

As for the government’s claim that forbearance compounds borrowers’ economic peril, Kagan said, “I guess I wonder, is that about COVID, or is that just about something that happens when you excuse loan payments for a long period of time? And how it is that that gets to be converted into an emergency COVID rationale?”

Solicitor General Pregolar admitted that the complexity of the U.S. economy makes it difficult to isolate cause and effect.

“It's, of course, true that I can't make a representation that the harms that borrowers are facing are solely due to COVID-19,” Pregolar said. “But I think that it would be an impossible burden to place on the Secretary to suggest that he needs to isolate and identify just one economic factor or force that's causing that kind of distress for borrowers.”

Chief Justice Roberts illustrated the complexity of tying a borrower's default risk to Covid-19, pointing to unpublished, pre-pandemic data from the Philadelphia Federal Reserve Bank. The 2019 data, which the administration used in part to justify forgiveness eligibility, showed that a significant percentage of student loan borrowers in income brackets that qualify for relief had a history of regularly repaying their loans.

“Didn't half the borrowers say they would not have any trouble paying their loans without regard to the forgiveness program?” the Chief Justice asked about the group of borrowers in the survey who earned between $55,000 to $74,000 in annual income.

“Yes, it's true that in certain income brackets, the data I think reflected that,” Pregolar said, adding that the financial insecurity of those with student loans falls as income rises. “That wasn't the only data the Secretary consulted, though.”

During the Nebraska case, Justice Barrett also asked Nebraska Solicitor General James Campbell to clarify the connection between the pandemic and the student debt relief offered by the Trump and Biden administrations.

Campbell made a distinction between the pause on repayments legalized by the CARES Act that the Trump and Biden administrations extended and Biden’s debt forgiveness plan. Pauses on student loan payments, he argued, qualify as modifications permitted by the HEROES Act, because they coincided with the Covid-19 national emergency and kept the status quo in place.

“At some point, I think it goes beyond a modification and the connection to the national emergency became too tenuous to maintain it,” he said. “[W]hen you put a pause in place, when the nation is still dealing with lockdown conditions, there's a pretty close connection between that and a national emergency. When two and a half years down the road, the Secretary, having much time to contemplate the situation, comes in and creates a debt forgiveness program for 95% of borrowers, the connection to the national emergency is too tenuous.”

Still, the legality of the debt forgiveness plan could give way to concerns over standing, voiced by justices across the ideological spectrum. In both cases, the justices questioned whether the plan's challengers — six Republican state attorneys general and two student loan borrowers — were the right ones to contest the U.S. Education Secretary's authority. A finding that both parties lack standing would supersede the legality issue, and absent further holdings from the court, the administration could move to forgive student debt, as planned.

Biden v. Nebraska is brought by the administration against six Republican state attorneys general — Arkansas, Iowa, Kansas, Nebraska, Missouri, and South Carolina — who say the forgiveness plan requires, yet never received, Congress' authorization. The AGs, who obtained an injunction blocking the plan from the Eighth Circuit Court of Appeals, also say that with fewer loans on their books, future state tax revenues will suffer. Missouri specifically argues that MOHELA (Missouri Higher Education Loan Authority), the nation's largest loan servicer, will collect less interest than planned on its furnished loans.

The other case, Department of Education v. Brown, is filed by two student loan debtors — one who doesn't qualify for relief under the plan and another who qualifies for partial forgiveness. They, too, argue that the Education Department needs Congressional approval to adopt its plan — and that they were improperly denied the opportunity to comment on its provisions. Their case is backed by conservative advocacy group, Job Creators Network Foundation.

The U.S. Department of Education, which adopted the plan, estimates that as of December 2022, approximately 43 million borrowers held federally backed student loan debt totaling more than $1.6 trillion. However, forgiveness as envisioned is available only to federal loan borrowers with annual incomes under $125,000 (or $250,000 per household). Those borrowers are eligible for up to $10,000 in forgiveness, and borrowers who also received Pell Grants can receive another $10,000 in relief.

Alexis Keenan is a legal reporter for Yahoo Finance, an attorney, and co-creator of the documentary, Valley of Hype. Follow Alexis on Yahoo Finance and Twitter @alexiskweed.

Yahoo Finance is on Twitter, Facebook, Instagram, Flipboard, LinkedIn, and YouTube

Find live stock market quotes and the latest business and finance news