New Lawsuit Could Throw Student Loan System Into Chaos, But It Faces Hurdles

WASHINGTON, DC – FEBRUARY 27: Student loan borrowers gather at Supreme Court the evening before the … [+] court hears two cases on student loan forgiveness to state the student debt relief is legal and needs to happen immediately on February 27, 2023 in Washington, DC. (Photo by Jemal Countess/Getty Images for We The 45 Million)

Getty Images for We The 45 Million

A major student loan company is suing the Biden administration to try to stop the ongoing student loan pause. If a court forces an early end to the moratorium on student loan payments, interest, and collections, an abrupt return to repayment could be a disaster for millions of federal student loan borrowers. But the lawsuit itself may face some challenges.

Here’s what borrowers should know.

Lawsuit Seeks To End Student Loan Pause

Earlier this week, SoFi — a major private student loan refinancing company — filed a lawsuit against the Education Department seeking to end President Biden’s most recent extension of the student loan pause.

The pause, which has suspended billing and frozen interest on all government-held federal student loans, has been in effect since March 2020. Originally intended to last six months under the CARES Act (legislation that enabled the student debt relief), President Trump and President Biden authorized several short-term extensions under the HEROES Act, which allows the Education Department to modify or waive federal student loan programs during national emergencies. The pause is now in its 36th month, and Biden’s most recent extension is set to end this summer.

SoFi argues that Biden’s current extension is unlawful because rather than being tied to the pandemic emergency, the administration extended the student loan pause in response to the Supreme Court battle over the administration’s separate student loan forgiveness initiative. That plan could wipe out up to $20,000 in federal student loan debt for millions of borrowers. SoFi argues that the pause has reduced its earnings and profits because far fewer borrowers are interested in refinancing their federal student loans while they have a zero precent interest rate and no payments due.

Abrupt End To Student Loan Pause Could Cause Problems For Borrowers

The Education Department has long promised borrowers that there would be plenty of advance notice and a long on-ramp before student loan payments resume. And in fact, the CARES Act required the department to issue multiple notices to borrowers before student loan payments turn back on.

But if a federal court responds favorably to the SoFi lawsuit and ends the student loan pause early, millions of borrowers may be unprepared. 40 million people have not had to budget for student loan repayment for three years. In the meantime, recent economic data suggests that many Americans are already falling behind on major obligations such as consumer credit cards and utility bills. The reasons are complex but may include an end to pandemic-related stimulus assistance, historically high inflation, and some families overextending themselves financially.

Abruptly resuming student loan payments without sufficient lead time to prepare could cause many borrowers to struggle with repayment or default on their student loans. In a November survey by Savi and the Student Debt Crisis Center that polled nearly 32,000 borrowers, nearly 50% of respondents say they would be unable to afford their student loan payments within six months, and nearly 9 in 10 say they were concerned or very concerned that inflation would make it more difficult to afford student loan payments.

Loan Servicers May Not Be Ready For Student Loan Pause To End Abruptly

It’s not just borrowers who may struggle with an abrupt return to repayment. Student loan servicers — contractors for the Education Department that operate the federal student loan system — may also not be able to handle an unexpected early end of the student loan pause.

Given the long period of paused payments, some student loan servicers have laid off employees, resulting in a diminished workforce. That means there are fewer people to field phone calls from borrowers and process paperwork, such as repayment plan applications. During the last several months, borrowers have reported long call hold times and delays in processing applications for various student loan programs. Loan servicers may not be able to handle an abrupt influx of phone calls and applications, which could cause major problems for borrowers trying navigate a return to repayment. It could take months for loan servicers to recruit, hire, and train new staff.

Potential Problems With SoFi Student Loan Pause Lawsuit

While an early end to the student loan pause could cause widespread problems, a victory for SoFi is not a foregone conclusion.

SoFi may have some difficulty demonstrating it has standing to sue in federal court. To have standing, a party must demonstrate a sufficiently concrete injury that stems from the challenged rule or policy. Lost or diminished profits can sometimes be difficult to prove, and the Biden administration could argue that this type of harm is too speculative or hypothetical to confer standing on the company.

In addition, SoFi may face challenges on the merits of its suit. The Biden administration will likely argue that the latest extension of the pause is, in fact, directly tied to the pandemic emergency, as the student loan forgiveness initiative currently before the Supreme Court was designed to address widespread pandemic-related harm before student loan payments resume. Notably, during last month’s Supreme Court hearing on Biden’s loan forgiveness initiative, even some of the more conservative justices seemed to concede that the HEROES Act confers fairly significant authority on the Education Department to pause student loan payments and interest.

Practically speaking, with the pause set to end 60 days after either June 30 or the date that the Supreme Court issues a decision on President Biden’s student loan forgiveness plan, a court would have to rule very quickly in SoFi’s favor for the payment pause to end sooner than that. That’s possible, but far from guaranteed.

Ultimately, borrowers will have to contend with some level of uncertainty as the SoFi lawsuit proceeds.