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Appeals Court Blocks Biden’s Student Debt Cancellation Plan

The decision comes days after the government temporarily stopped accepting applications for the debt relief because of legal challenges.

President Biden speaking at a podium behind a banner that reads “Lowering Costs for American Families.”
President Biden spoke about student debt relief in Albuquerque this month.Credit...Tom Brenner for The New York Times

Stacy Cowley covers consumer finance and small business out of New York. She has been tracking President Biden’s student debt cancellation plans closely.

A federal appeals court on Monday issued an injunction halting President Biden’s student debt cancellation plan, further clouding the future of the president’s promise to eliminate hundreds of billions of dollars in debt for tens of millions of people.

In a six-page order, three judges from the U.S. Court of Appeals for the Eighth Circuit unanimously blocked the government from canceling debts while the court considers a lawsuit brought by six Republican-led states, which claim that the president’s executive action to wipe out up to $20,000 in federal student loan debt per borrower exceeded his authority.

The case involves “substantial questions of law which remain to be resolved,” the judges wrote, adding that its eventual outcome “will affect the finances of millions of Americans.”

Two of the three judges — Ralph R. Erickson and Leonard Steven Grasz— were appointed by former President Donald J. Trump. The third, Bobby Shepherd, was appointed by former President George W. Bush.

The decision came about three weeks after the appeals court granted a temporary stay pausing President Biden’s plan while it reviewed the states’ lawsuit, which a district court judge had previously dismissed for lack of standing.

The states pursuing the lawsuit — Nebraska, Missouri, Arkansas, Iowa, Kansas and South Carolina — have argued that Mr. Biden’s cancellation plan would deprive them of tax revenue. When debt is canceled, it is typically taxed as income, but Congress last year exempted any student debt forgiven by the end of 2025 from being federally taxed. The states said Mr. Biden’s action would “immediately reduce the pool of debt to discharge in the future” and reduce their future tax income.

The Eighth Circuit determined that the states did have standing because one of the vendors that collects student loan payments on the government’s behalf — the Missouri Higher Education Loan Authority, known as MOHELA — is a quasi state organization that “may well be an arm of the state of Missouri,” the judges wrote.

Because the government’s loan servicers are paid based on the number of customer accounts they handle, loan cancellation would reduce both MOHELA’s workload and its earnings. MOHELA, a nonprofit, returns some of its profits to Missouri to support the state’s higher-education funding. Therefore, Mr. Biden’s plan “presents a threatened financial harm” to Missouri, the judges concluded.

MOHELA is not a party to the lawsuit and has distanced itself from the case. The company’s executives have previously said they were “not involved” with the Missouri attorney general’s decision to file the lawsuit.

In an emailed statement, Karine Jean-Pierre, the White House press secretary, said that the administration was “confident in our legal authority for the student debt relief program,” and that it would “continue to fight these baseless lawsuits by Republican officials and special interests.”

Mr. Biden’s plan, announced in August, would cancel $10,000 in debt for those earning less than $125,000 per year and $20,000 for those who had received Pell grants for low-income families. It would be one of the most expensive executive actions in history, with a price tag the nonpartisan Congressional Budget Office estimated at around $400 billion.

Since 2010, the Education Department has been the primary lender for Americans who borrow to attend college, and it now owns $1.5 trillion in student loan debt. Under Mr. Biden’s plan, nearly 26 million borrowers have applied to have their federal student loan debt wiped out. The government has already approved 16 million applications, but no debt has been canceled yet because of legal challenges.

The states’ case is widely considered the most serious of multiple lawsuits seeking to stop Mr. Biden’s proposal.

In response to a separate lawsuit, a Texas district court judge struck down Mr. Biden’s action last week, saying it did not have “clear congressional authorization.” That lawsuit was brought by two borrowers who did not qualify for the maximum debt cancellation under Mr. Biden’s plan, which it called “irrational, arbitrary and unfair.”

Right after that ruling, the Education Department stopped accepting applications on its StudentAid.gov website. The department said it was trying to overturn the legal orders blocking debt cancellation.

“If you’ve already applied, we’ll hold your application,” the agency said.

Judge Mark Pittman, of the U.S. District Court for the Northern District of Texas, ruled last week that Mr. Biden had overstepped his authority. The Justice Department immediately appealed Judge Pittman’s decision to the U.S. Court of Appeals for the Fifth Circuit.

The Supreme Court is widely expected to take up the issue, although it has not said so.

Justice Amy Coney Barrett has, without comment, rejected two previous challenges to Mr. Biden’s debt cancellation plan. Last month, she turned away a case brought by a taxpayers’ association in Wisconsin. This month, she rebuffed a complaint from borrowers in Indiana. In both cases, lower courts had previously ruled that the challengers lacked the standing to sue.

The issue is gaining urgency as 45 million federal student loan borrowers face a January deadline to resume payments on their debts, which were paused in March 2020 as a pandemic relief measure. The moratorium began under former President Trump and was extended eight times, across two presidential administrations.

Stacy Cowley is a finance reporter with a focus on consumer issues and data security. She previously reported on a variety of business topics, including technology and economics, at CNN Money, Fortune Small Business, and other magazines and websites. More about Stacy Cowley

A version of this article appears in print on  , Section B, Page 3 of the New York edition with the headline: Biden Student Debt Relief Plan Is Blocked by an Appeals Court. Order Reprints | Today’s Paper | Subscribe

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