Lawsuit Stalls Student Debt Relief: What Now?

Ana Helhoski

The US Court of Appeals for the Eighth Circuit granted an emergency stay pending appeal of a lawsuit seeking to delay the scheduled launch of student debt relief promised by the Biden administration.

In other words, borrowers hoping to see $10,000 or $20,000 eliminated from their debts will have to wait while this lawsuit proceeds; Hearings are already scheduled for next week. There are also four other lawsuits pending appeal or awaiting hearing.

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The stay is no reason to panic, says Mike Pierce, director and co-founder of the Student Borrower Protection Center. It is procedural. The court cannot make a decision, says Pierce, when it has not been fully informed. The suspension requires a response from the Justice Department by Tuesday afternoon.

“There’s really nothing to see here,” says Pierce.

The temporary suspension came just days before early borrowers were expected to see their balances reduced. The White House said earlier this month that it would not deliver aid before October 23.

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On Oct. 21, Biden said 22 million borrowers had already applied since the form first launched in beta a week earlier. The White House has declared that approximately 40 million borrowers would be eligible for cancellation. The debt relief application is still open.

What does the lawsuit claim?

Six states — Arkansas, Iowa, Kansas, Missouri, Nebraska and South Carolina — jointly say Biden’s debt relief would hurt tax revenues in their states and the finances of state lending agencies. All six states are run by Republicans.

These student loan companies and servicers service business FFELP loans, an older type of federal student loan originally financed by private companies. They claim that allowing FFELP borrowers to consolidate their loans in order to be eligible for discharge would hurt their bottom line because it would eliminate or reduce advance interest payments.

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In response, the Biden administration in late September revoked cancellation eligibility for borrowers with commercial FFELP loans.

A federal district judge dismissed the case on October 20; the plaintiffs immediately filed an emergency motion with the 8th US Circuit Court of Appeals for an administrative stay. They asked the court to stop the debt cancellation’s scheduled launch before 9am CST on Saturday, October 22.

The court did not wait that long; approved the administrative suspension on Friday.

Where does this leave borrowers?

Borrowers who applied for or were waiting for automatic relief are now in limbo. And federal student loan payments are expected to resume in January 2023 after a nearly three-year pause due to the pandemic, unless the pause is extended again.

No further extension has been announced yet. It’s smarter to proceed as if payments resume as scheduled on January 1.

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If you qualify for debt relief and haven’t applied for it, please do so. It can’t hurt, and it will secure your place in line if the legal hurdles are removed.

If you were planning to seek a refund for payments made during the pause, please reconsider. You can still request a refund, but as before, the refunded amount will be added to your loan balance.

If you’ve already received a refund for payments made during the break, don’t spend it. If one of the claims is successful, you may want to pay it back to your loan balance.

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