In one of the first significant legal challenges to President Joe Biden’s student loan forgiveness plan, a public interest lawyer filed a lawsuit Tuesday arguing that the policy is an abuse of executive power.
Plaintiff Frank Garrison claims that because of the forthcoming student loan forgiveness, he will be forced to pay state taxes on the amount canceled – an expense he would otherwise avoid.
The lawsuit is backed by Garrison’s employer, the Pacific Legal Foundation – a nonprofit libertarian law firm. It was filed in the US District Court for the Southern District of Indiana.
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The lawsuit, which names the Department of Education as a defendant, challenges the agency’s “unacceptable abuse of executive authority to restore the rule of law and to enforce the Constitution’s separation of powers,” according a press release from the Pacific Legal Foundation.
The Department of Education did not immediately respond to a request for comment.
Under Biden’s plan, individual borrowers who earned less than $125,000 in either 2020 or 2021 and married couples or heads of households who made less than $250,000 annually in those years will see up to $10,000 of their federal student loan debt forgiven.
If a qualifying borrower also received a federal Pell grant while enrolled in college, the individual is eligible for up to $20,000 of debt forgiveness. Pell grants are awarded to millions of low-income students each year, based on factors including their family’s size and income and the cost charged by their college. These borrowers are also more likely to struggle to repay their student debt and end up in default.
Borrowers will not have to pay federal income tax on the student loan debt forgiven, thanks to a provision in the American Rescue Plan Act that Congress passed last year.
But there are a handful of states that may tax discharged debt if state legislative or administrative changes are not made beforehand, according to the Tax Foundation. The tax liability could be hundreds of dollars, depending on the state.
This story is breaking and will be updated.
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