If the Supreme Court strikes down student-loan forgiveness, it could have 'startling implications,' Biden says — and set a strange legal precedent going forward

Biden's administration filed its full legal defense of its student-debt relief plan to the Supreme Court.

Student-loan company MOHELA is central to the lawsuit filed by six GOP-led states.

The DOJ said that ruling in favor of the states' argument could set a strange legal precedent.

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A Missouri-based student-loan company has found itself at the center of a lawsuit blocking student-loan forgiveness — and President Joe Biden's administration said its role could set a strange legal precedent moving forward.

It's a critical year for millions of student-loan borrowers as Biden's plan to cancel up to $20,000 in student debt will have its day at the Supreme Court on February 28. For over two months, implementation of the relief has been blocked due to two lawsuits against the administration. One was filed by two student-loan borrowers who did not qualify for the full $20,000 amount of relief, and another by six Republican-led states who said the relief would hurt their states' tax revenues, along with that of student-loan company MOHELA.

While the administration has pushed back on the arguments in both cases and claimed neither of them have the standing to sue, the latter — involving MOHELA — is complex, given that the company itself denied it had any involvement in the case in November following the 8th Circuit ruling that blocked the relief.

Adding to that complexity, the Justice Department wrote in a legal filing on Wednesday night that upholding the 8th Circuit's ruling would mean that "banks could sue anyone who causes financial harm to their borrowers, credit-card companies could sue anyone who causes financial harm to their customers, and governments could sue anyone who causes financial harm to their taxpayers."

Dalié Jiménez, a law professor at University of California Irvine and director of the Student Loan Law Initiative, told Insider that Biden's legal defense "did a really good job in saying that if A causes financial harm to B, and B owes money to C, then C can sue... and that's bonkers."

She added that the states' standing is questionable, and she's concerned of the legal precedent it would set should the Supreme Court rule in their favor.

"I think this is an important case," Jiménez said. "I'm a little bit afraid of what is going to happen more for the larger implications on what the Supreme Court does, what its purpose is, and its role and legitimacy.

Favoring the GOP-led states' case has "startling implications"

Since the lawsuit arose, Biden's Justice Department has argued that MOHELA is a separate entity from the state and can sue and be sued on its own, and the department responded to the states' claim that the relief would cause MOHELA to stop receiving servicing fees, which would impair the company's "ability to fulfill its state-law obligation to contribute a specified amount of money to the state treasury."

"But the States have never alleged that the plan will cause MOHELA to default on its obligations to the State," the Justice Department wrote. "And it is pure speculation that, if the plan causes a reduction in MOHELA's revenues, MOHELA will respond by defaulting on its obligations rather than, say, cutting its other expenditures."

Steve Vladeck, a professor at the University of Texas School of Law, said during a Wednesday press call that every case filed in a federal court has to demonstrate that the plaintiff would be injured by the policy, that the injury can be directly traced back to the defendant, and that the relief they're seeking would address those injuries.

But the harms MOHELA could suffer are unknown and "Missouri itself is not harmed directly, and... the indirect harm Missouri suffers through the harm to MOHELA is speculative at best," Vladeck said.

And, as the Justice Department wrote in its filing, four of the states — Iowa, Kansas, Nebraska, and South Carolina — said the debt relief would also hurt their tax revenues because their state tax codes chose to include debt relief as gross income, even though federal law prevents debt relief from being taxed through 2025.

"Any harm to the States' treasuries here is likewise self-inflicted," the filing said, adding that "any resulting reduction in their tax revenues is fairly traceable not to the Secretary's plan, but instead to their own choices about how to structure their tax laws."

Should the Supreme Court rule in favor of the states, it would have "startling implications," the filing said.

"Virtually all federal actions—from prosecuting crime to imposing taxes to managing property—have some incidental effects on state finances," it said. "If such incidental effects suffice for standing, every State would have standing to challenge almost any federal policy."

While Biden's Education Department extended the student-loan payment pause 60 days after June 30 or when the lawsuits are resolved — whichever happens first — Jiménez said that if the Supreme Court ends up striking down the debt relief, it's vital the administration finds another way to deliver student-loan forgiveness before payments resume.

"I do think that even if they end up holding this particular cancellation program to not be proper, that there are other ways that the administration can do this and should do this," she said.