Case 1:23-cv-11906-TLL-PTM ECF No. 1, PageID.

1 Filed 08/04/23 Page 1 of 22

IN THE UNITED STATES DISTRICT COURT

CATO INSTITUTE

and

MACKINAC CENTER FOR PUBLIC POLICY

Plaintiffs,

v.
CIVIL CASE NO. ____________
MIGUEL CARDONA, Secretary, U.S.
Department of Education, in his official capacity; COMPLAINT
FOR DECLARATORY,
RICHARD CORDRAY, Chief Operating Officer INJUNCTIVE, AND OTHER
of Federal Student Aid, U.S. Department of RELIEF
Education, in his official capacity;
JURY TRIAL DEMANDED
U.S. DEPARTMENT OF EDUCATION;

Defendants.

INTRODUCTION

Before the ink dried on the Supreme Court’s June 30 decision striking down a $430 billion

student-loan cancellation program previously announced by the Defendant Department of Education

(the “Department),1 the Department announced a host of equally unlawful loan cancellation schemes.2

Among these is the cancellation of $39 billion owed to the Treasury by 804,000 student-loan

1 See Biden v. Nebraska, 143 S.Ct. 2355 (2023).

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borrowers starting August 13, 2023, a plan the Department put on an accelerated schedule apparently

designed to evade judicial review.3

That $39 billion cancellation is part of an even broader plan to wipe out the federal student-

loan debt owed by over 3.6 million borrowers. Under a so-called One-Time Account Adjustment, the

Department is crediting borrowers with at least three years of “forbearance” from making monthly

payments on their loans as qualifying monthly payments needed to earn loan forgiveness under the

Public Service Loan Forgiveness (PSLF) and Income-Drive Repayment (IDR) programs. But the

PSLF statute is clear that, in addition to working in a public service job for 10 years, a borrower must

make “monthly payments” under qualifying repayment plans throughout that 10-year period to receive

forgiveness. Statutes governing IDR programs likewise require qualifying “monthly payments” for

either 20 or 25 years. No authority allows the Department to count non-payments as payments.

In addition to illegally accelerating PSLF and IDR forgiveness by three years, the “One-Time

Account Adjustment” scheme will outright cancel a massive amount of debt owed to the Treasury.

By having their loans cancelled three years early, 3.6 million borrowers will each make 36 fewer

monthly payments, resulting in the cancellation of 130 million monthly payments. Thus, the $39 billion

cancellation of debt for 804,000 borrowers that will occur in August 2023 is just the tip of the

iceberg—2.8 million other affected borrowers await similar future cancellation under the same illegal

forbearance-credit scheme. Assuming the per-borrower cost of cancellation remains unchanged, the

entire scheme will cost taxpayers $175 billion. Despite its massive expense and impact on the legal

rights and obligations of millions of borrowers, the Department did not promulgate this policy

3U.S. Dep’t of Educ., Press Release, Biden-Harris Administration to Provide 804,000 Borrowers with $39
Billion in Automatic Loan Forgiveness as a Result of Fixes to Income Driven Repayment Plans, July 14,
2023, https://www.ed.gov/news/press-releases/biden-harris-administration-provide-804000-borrowers-39-
billion-automatic-loan-forgiveness-result-fixes-income-driven-repayment-plans (last visited August 4, 2023).

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through mandatory notice-and-comment and negotiated rulemaking procedures. Instead, it used a

press release that neither identified the policy’s legal authority nor considered its exorbitant price tag.

The inescapable conclusion is that the One-Time Account Adjustment is substantively and

procedurally unlawful. In granting unearned credits toward loan forgiveness, the Department directly

reduces from 10 years to only seven years the incentive for the 3.6 million affected borrowers to

participate in the statutory PSLF program by working for public service employers like Plaintiffs while

making monthly payments. The Court should declare this forbearance-credit scheme unlawful, set it

aside, and enjoin any cancellation of student loans based on it.

PARTIES

1. Plaintiff Cato Institute is a § 501(c)(3) organization that is incorporated in Kansas and

has its headquarters in Washington, D.C. With 186 employees, Cato regularly competes to recruit and

retain talented employees for staff positions, helped by the incentives Congress provided through the

PSLF program. See Declaration of Peter Goettler (Goettler Decl.) (Attached as Exhibit 1).

2. Plaintiff Mackinac Center for Public Policy is a § 501(c)(3) organization that is

incorporated in Michigan and has its headquarters in Midland, Michigan. With 45 employees, the

Mackinac Center regularly competes to recruit and retain college-educated employees for staff

positions, helped by the incentives Congress provided through the PSLF program. See Declaration of

Joseph G. Lehman (Lehman Decl.) (Attached as Exhibit 2).

3. Defendant U.S. Department of Education is an agency of the United States.

4. Defendant Miguel Cardona is sued in his official capacity as Secretary of the U.S.

Department of Education (Secretary).

5. Defendant Richard Cordray is sued in his official capacity as Chief Operating Officer

of Federal Student Aid of the U.S. Department of Education.

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JURISDICTION AND VENUE

6. This Court has jurisdiction pursuant to 5 U.S.C. §§ 702 and 703 and 28 U.S.C. §§ 1331,

1361, and 2201.

7. This Court is authorized to award the requested declaratory and injunctive relief under

5 U.S.C. §§ 702 and 706, 28 U.S.C. §§ 1361 and 2201-2202, and under its inherent equitable powers.

8. Venue is proper within this district pursuant to 28 U.S.C. § 1391. Defendants are

United States agencies or officials sued in their official capacities. Plaintiff Mackinac Center has its

principal place of business in this judicial district and substantial parts of the events or omissions

giving rise to the Complaint occurred within this district.

STATEMENT OF FACTS

I. LEGAL BACKGROUND

9. The Department administers student loan programs under Title IV of the Higher

Education Act (HEA) of 1965, 20 U.S.C. § 1070 et seq. Outstanding federal student loan debt exceeds

$1.6 trillion and is owed by approximately 45 million borrowers.4

10. Under the Federal Direct Loan program, which accounts for most federal student

debt, “the federal government makes loans” directly to borrowers “using federal capital (i.e., funds

from the U.S. Treasury), and once made, outstanding loans constitute an asset of the federal

government.”5

11. Congress has authorized several programs that allow Defendants to forgive the unpaid

debt owed by certain student-loan borrowers who make qualifying monthly payments on those loans

for a certain number of years. These include the PSLF and IDR programs.

4Alexandra Hegji, Kyle D. Shohfi & Rita R. Zota, Cong. Rsch. Serv., R47196 Federal Student Loan Debt
Cancellation: Policy Considerations (2022).
5 Id. at 2.

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Public Service Loan Forgiveness Program

12. The College Cost Reduction and Access Act of 2007 (CCRA), Pub. L. 110-84, 121

Stat. 784, established the PSLF program. 20 U.S.C. § 1087e(m). Under PSLF, “[t]he Secretary shall

cancel the balance of interest and principal due … on any eligible Federal Direct Loan not in default

for a borrower who” meets two statutory qualifications. 20 U.S.C. § 1087e(m).

13. First, the borrower must have “made 120 monthly payments … pursuant to any one

or a combination of [qualifying repayment plans.]” Ibid.

14. Second, the borrower must be “employed in a public service job at the time of such

forgiveness” and must have been “employed in a public service job during the period in which the

borrower made each of the 120 payments.” Ibid.

15. Qualifying repayment plans include an IDR plan under either 20 U.S.C.

§ 1087e(d)(1)(D) or § 1098e, a standard repayment plan under § 1087e(d)(1)(A), or a repayment plan

with a monthly payment at least equal to the standard plan. Ibid. Additionally, “the borrower must

make the monthly payments within 15 days of the scheduled due date for the full scheduled installment

amount.” 34 C.F.R. § 685.219(c)(1)(iii).

16. There is no statutory or regulatory provision for non-payments during periods of

forbearance to count toward PSLF’s requirement of 120 monthly payments. As even late or partial

payments under a qualified plan do not count, ibid., non-payments clearly do not count.

17. A “public service job” means full-time work for a qualified public service employer,

which includes nonprofit organizations under § 501(c)(3) of the Internal Revenue Code. 20 U.S.C.

§ 1087e(m)(1)(B). Plaintiffs qualify as public service employers under PSLF.

18. PSLF “promotes the interests of public service employers by providing significant

financial subsidies to the borrowers they hire on the condition they remain employed in public

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service,” thereby “increasing recruitment and lowering labor costs” for those employers. ABA v. Dep’t

of Educ., 370 F. Supp. 3d 1, 19 (D.D.C. 2019).

Income-Driven Repayment Programs

19. Direct-loan borrowers have access to four types of IDR plans, each of which caps

monthly payments as a percentage of discretionary income and provides for forgiveness of the unpaid

balance at the end of the plan’s repayment period—either 20 or 25 years, depending on the plan and

circumstances.6

20. First, the income-contingent repayment plan (ICR) was established in 1994 under

amendments to the HEA made by the Omnibus Budget Reconciliation Act of 1993. See 20 U.S.C.

§ 1087e(e); 34 C.F.R. § 685.209(b).

21. ICR caps a borrower’s monthly payment at 20 percent of income above the federal

poverty line. 34 C.F.R. § 685.209(b)(1). If the loan has not been repaid in full by the end of the 25-

year repayment period, the remaining debt is cancelled under § 685.209(b)(3)(iii)(D). To qualify for

such cancellation, the borrower must have spent each month of the 25-year period either making

“monthly payments” under a qualifying repayment plan or receiving individualized “economic

hardship deferment” under 20 U.S.C. § 1085(o). 34 C.F.R. § 685.209(b)(3)(iii); see also 20 U.S.C. §

1087e(e)(7).

22. Qualifying monthly payments for ICR are the same as for PSLF, i.e., an IDR plan, a

standard repayment plan, or a repayment plan with a monthly payment at least equal to the standard

plan. Compare 20 U.S.C. § 1087e(e)(7) with id. § 1087e(m)(1)(A). Neither statutory nor regulatory

authority exists to count non-payments during periods of forbearance as qualified monthly payments.

6 The Department promulgated a final rule that combines the different IDR programs into a single program
with new parameters. See Dep’t of Educ., Improving Income Driven Repayment for the William D. Ford Direct Loan
Program and the Federal Family Education Loan (FFEL) Program, 88 Fed. Reg. 43,820 (July 10, 2014). But most
provisions of that rule do not come into effect until July 1, 2024, and the provisions that have an earlier
effectiveness date are not relevant for the claims in this complaint.

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23. Economic hardship deferment under 20 U.S.C. § 1085(o) is available to full-time

workers whose incomes do not exceed the greater of the federal minimum wage or 150 percent of the

poverty line. The Department’s regulations further define “economic hardship” to include borrowers

who receive means-tested public assistance or work for the Peace Corps. 34 C.F.R. § 685.204(g)(2).

A borrower may not receive more than three years of economic hardship deferment. 20 U.S.C.

§ 1087e(f)(D).7 Non-payments during periods of forbearance from payment do not count toward the

three-year limit on “economic hardship deferment.”

24. Second, the income-based repayment plan (IBR) was established in 2008 under

provisions of the 2007 CCRA. 20 U.S.C. § 1098e. The Health Care and Education Reconciliation Act

of 2010 (HCERA) extended more generous terms to IBR participants with loans after July 2014. Id.

§ 1098e(e).

25. IBR caps a “borrower’s aggregate monthly loan payments … to no more than 15

percent, or for a [post-July 2014] borrower, 10 percent of the amount by which the borrower’s [annual

income] exceeds 150 percent of the poverty guideline applicable to the borrower’s family size, divided

by 12.” 34 C.F.R. § 685.221(b)(1).

26. IBR participants may “qualify for loan forgiveness after 25 years or, for a [post-July

2014] borrower, after 20 years.” Id. § 685.221(f)(1). But they must have spent each month of the 20-

or 25-year period either making “monthly payments” under a qualifying repayment plan or receiving

“economic hardship deferments” under 20 U.S.C. § 1085(o). Ibid.

27. Qualifying repayment plans for IBR are the same as for PSLF, i.e., an IDR plan, a

standard repayment plan, or a repayment plan with a monthly payment at least equal to the standard

plan. Compare 20 U.S.C. § 1098e(b)(7) with § 1087e(m)(1)(A).

7The HEA recognizes other types of deferment, including for study, unemployment, and military service. 20
U.S.C. § 1087e(f)(A)-(C). But these other types of deferment do not count toward ICR’s forgiveness period.

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28. Third, the Pay As You Earn (PAYE) plan was established in 2012 under the 1993 ICR

provisions. See 34 U.S.C. § 685.209(a). PAYE caps monthly payment to 10 percent of income above

150 percent of the poverty line and provides for forgiveness after 20 years. Id. § 685. 209(a)(2), (a)(6).

PAYE participants qualify for forgiveness if they spent each month of the 20-year period either

making “monthly payments” under a qualifying repayment plan or receiving “economic hardship

deferment” under 20 U.S.C. § 1085(o). Id. § 685.209(a)(6).

29. Qualifying monthly payments for PAYE are the same as for PSLF, i.e., an IDR plan,

a standard repayment plan, or a repayment plan with a monthly payment at least equal to the standard

plan. Compare 20 U.S.C. § 1087e(e)(7) with id. § 1087e(m)(1)(A).

30. Fourth, the Revised Pay As You Earn (REPAYE) plan was established in 2015 under

the 1993 ICR provisions. 34 C.F.R. § 685.209(c). REPAYE caps monthly payments to “10 percent of

the amount by which the borrower’s [annual income] exceeds 150 percent of the poverty guideline

applicable to the borrower’s family size, divided by 12.” Id. § 685.209(c)(2)(i).

31. REPAYE participants qualify for loan forgiveness after 20 years if all loans are for

undergraduate study, or after 25 years if some loans are for graduate or professional study. Id.

§ 685.209(c)(5). To obtain forgiveness, REPAYE participants must have spent each month of the 20-

or 25-year period either making “monthly payments” under a qualifying repayment plan or receiving

“economic hardship deferment” under 20 U.S.C. § 1085(o). Ibid.

32. Qualifying monthly payments for REPAYE are the same as for PSLF, i.e., an IDR

plan, a standard repayment plan, or a repayment plan with a monthly payment at least equal to the

standard plan. Compare 20 U.S.C. § 1087e(e)(7) with id. § 1087e(m)(1)(A).

33. In sum, to receive cancellation of loans under any of the IDR plans that existed in

April 2022 (including ICR, IBR, PAYE, and REPAYE), a borrower must spend a prescribed period—

20 or 25 years, depending on the plan—either making “monthly payments” under a qualifying

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repayment plan or receiving “economic hardship deferment” as defined by 20 U.S.C. § 1085(o). 34

C.F.R. §§ 685.209(a)(6) (PAYE); 685.209(b)(3)(iii) (ICR); 685.209(c)(5) (REPAYE); 685.221(f) (IBR).

II. DEFENDANTS CREDIT FORBEARANCE TOWARD IDR AND PSLF FORGIVENESS

34. Forbearance under the HEA means “permitting the temporary cessation of payments,

allowing an extension of time for making payments, or temporarily accepting smaller payments than

previously scheduled.” 34 C.F.R. §§ 682.211(a)(1), 685.205(a). Forbearance may be granted by either

a loan servicer or the Secretary under circumstances specified by the Department’s regulations. Ibid.

35. There is no statutory or regulatory authority to count non-payments during periods of

forbearance as qualifying monthly payments for PSLF or IDR.

36. Nor do periods of forbearance count as “economic hardship deferment.” To start,

forbearance can be granted by either the Secretary or a servicer, whereas only the Secretary may grant

economic hardship deferment. See 20 U.S.C. § 1087(f)(2)(D). Forbearance and economic hardship

deferment have different eligibility requirements. Compare 34 C.F.R. §§ 682.211(a)(1) and 685.205(a)

with id. § 685.204(g)(2). Whereas economic hardship deferment is capped at three years, forbearance

can be renewed indefinitely so long as the requesting borrower meets the regulatory conditions, compare

id. § 685.205(c)(2) with § 685.204(g)(1).

37. Nonetheless, on April 19, 2022, the Department announced in a press release that it

would make a One-Time Account Adjustment in order to credit periods of long-term forbearance

toward PSLF’s 10-year monthly-payment requirement and toward IDR’s 20- or 25-year payment-or-

deferment requirement.8

8U.S. Dep’t of Educ. Press Release, Department of Education Announces Actions to Fix Longstanding
Failures in Student Loan Programs, Apr. 19, 2022, https://www.ed.gov/news/press-releases/department-
education-announces-actions-fix-longstanding-failures-student-loan-programs (last visited July 26, 2023).

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38. According to the press release, the One-Time Account Adjustment “result[ed] in

immediate debt cancellation for at least 40,000 borrowers” under PSLF, and “[m]ore than 3.6 million

borrowers … receive[d] at least three years of additional credit toward IDR forgiveness.”9

39. The IDR credits alone are equivalent to cancelling debt equal to 3 years’ worth of

payments per affected borrower. Each of the 3.6 million affected borrowers will make three fewer

years of payments (36 monthly payments) before his or her debt is cancelled under IDR. The One-

Time Account Adjustment thus costs the Treasury at least 130 million forgone monthly payments

without even considering the cost of accelerated forgiveness under PSLF. The Department did not

estimate the cost to taxpayers of providing such a cancellation. Or, if it did conduct an internal

estimation, the press release did not announce the results of that analysis.

40. Defendants’ April 2022 press release claimed the One-Time Account Adjustment

addressed “inappropriate steering into long-term forbearance” by loan servicers.10 But it neither

defined inappropriate steering nor estimated how many borrowers were steered inappropriately. It

instead granted forbearance credits to all borrowers who experienced long-term forbearance—

including those whose forbearance was granted by the Secretary of Education—without regard for

whether they were steered inappropriately by a loan servicer.

41. The Department did not cite any legal authority for making this Adjustment.

42. On July 14, 2023, the Department announced that it will cancel $39 billion of student-

loan debt owed by 804,000 borrowers under IDR plans—approximately $50,000 per borrower.11 The

Department confirmed this cancellation “is part of the Biden-Harris Administration’s implementation

of the [one-time] payment [ac]count adjustment announced in April 2022.”12

9 Id.
10 Id.
11 Supra at note 3.
12 Id.

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43. The 804,000 “borrowers will be informed by the Department starting [July 14] that

they qualify for forgiveness without further action on their part. Discharges will begin 30 days after

emails are sent.”13 Thus, unauthorized cancellation of $39 billion in student-loan debt owed to the

Treasury will start on August 13, 2023.

III. INJURY TO PLAINTIFFS AND OTHER PUBLIC SERVICE EMPLOYERS

44. The One-Time Account Adjustment injures Plaintiffs and other public service

employers by reducing PSLF incentives that benefit such employers in the competition to hire and

retain college-educated workers. ABA, 370 F. Supp. 3d at 19 (finding Article III injury based on

employer’s loss of PSLF incentives).

Plaintiffs Benefit from PSLF Incentives

45. Plaintiffs are nonprofit organizations under § 501(c)(3) of the Internal Revenue Code,

Goettler Decl. ¶ 4; Lehman Decl. ¶ 4, and are therefore qualified employers for the statutory PSLF

program, see 34 C.F.R. § 685.219(b).

46. Plaintiffs compete in the labor market to recruit and retain college-educated employees

for staff positions. The incentives Congress provided through the statutory PSLF program have

helped Plaintiffs recruit and retain such employees. Goettler Decl. ¶¶ 9-10; Lehman Decl. ¶¶ 9-10.

47. Plaintiffs have previously employed, and currently employ, borrowers who participate,

may become eligible to participate, or have previously participated in the statutory PSLF program.

Plaintiffs further expect to recruit other such employees in the future with the help of the incentives

Congress provided them through PSLF. Goettler Decl. ¶¶ 9-10; Lehman Decl. ¶¶ 9-10.

13 Id.

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48. Under PSLF, a borrower will have the balance of his or her federal direct loan debt

forgiven after making 10 years’ worth of qualified payments while working full-time at a qualifying

employer. 34 C.F.R. § 685.219(c).

49. Qualifying employers include government agencies, § 501(c)(3) nonprofit entities, and

other nonprofit entities that provide certain services. Id. § 685.219(b).

50. PSLF subsidizes qualifying employers’ staff-compensation costs by providing an

incentive for borrower-employees to seek and maintain employment with such employers rather than

employment with non-qualifying employers. ABA, 370 F. Supp. 3d at 19.

51. All else being equal, this incentive materially helps qualifying employers attract and

retain borrower-employees who might otherwise choose higher-paying employment with non-

qualifying employers in the private sector. Ibid.

52. Qualifying employers, including Plaintiffs, benefit from the PSLF subsidy to

borrowers because at a given salary level the total effective compensation to the borrower-employee

is higher than otherwise due to the value of the prospective loan forgiveness. This provides a cost

advantage to PSLF-eligible employers when competing for talent against non-PSLF-eligible

employers. Indeed, creating that deliberate advantage is the main point of the program.

53. The greater the outstanding debt the borrower-employee owes—and thus the amount

that will be forgiven under PSLF—the higher his or her effective subsidy is under PSLF.

54. Unlawful cancellation of student-loan debt reduces the amount of a borrower’s PSLF-

cancellable debt and thus reduces the amount by which PSLF benefits qualified employment.

Crediting Forbearance Toward PSLF Reduces Benefits to PSLF Employers

55. A month counts toward the 120-month requirement for PSLF forgiveness only if the

borrower both (1) works at a public service employer during that month and (2) makes a qualifying

monthly payment. 20 U.S.C. § 1087e(m)(1). So, the PSLF program designed by Congress envisions

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debt forgiveness only in exchange for making monthly payments while working at a public service

employer.

56. By counting non-payments during periods of forbearance toward the 120 months of

payments PSLF loan forgiveness requires, the Department shortens by 36 months the period affected

PSLF debtors otherwise must work for a public service employer in order to have their loans forgiven.

57. The period for which PSLF incentivizes these borrowers to work at public service

employers like Plaintiffs is thus shortened by 30 percent—the amount of forbearance credited as

“monthly payments” under the One-Time Account Adjustment.

58. Instead of ten years, an affected borrower who receives three years of forbearance

credit is incentivized to work for a public service employer while making monthly payments for only

seven years. This unlawful reduction in the PSLF service requirement injures public service employers

that rely on PSLF to recruit and retain college-educated employees.

59. Additionally, the One-Time Account Adjustment immediately cancelled the entire

student-loan debt of at least 40,000 borrowers by allowing them to count non-payments during

periods of forbearance as monthly payments required by PSLF.

60. But for the One-Time Account Adjustment, these 40,000 borrowers would have a

strong financial incentive under PSLF to seek and maintain employment with public service employers

like Plaintiffs for the entire 10-year statutory PSLF term. Reducing that financial incentive to seven

years through administrative fiat unlawfully deprives such employers of the full statutory benefit to

which they are entitled under PSLF.

Crediting Forbearance Toward IDR Reduces PSLF Benefits

61. Borrowers can simultaneously participate in IDR and PSLF, so they can have monthly

payments capped by one of the IDR plans and have their debt forgiven after working only 10 years in

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public service jobs—as opposed to 20 or 25 years under IDR—provided that they make all 120 PSLF-

qualifying monthly payments. 20 U.S.C. § 1087e(m).

62. In addition to being faster, forgiveness under PSLF requires a borrower to make 120

fewer monthly payments compared to forgiveness under a 20-year IDR plan and 180 fewer monthly

payments compared to a 25-year IDR plan. Fewer monthly payments provide a significant financial

incentive to work for public service employers like Plaintiffs instead of waiting for IDR forgiveness.

63. Under the One-Time Account Adjustment, “[m]ore than 3.6 million borrowers …

receive at least three years of additional credit toward IDR forgiveness,” by having periods of

forbearance count toward IDR’s 20-year or 25-year requirements. These affected IDR borrowers did

not receive forbearance credited toward PSLF because, presumably, they were not working for a

public service employer during their periods of forbearance.14

64. For these 3.6 million borrowers, the Department has effectively reduced the 20-year

monthly-payment requirement for post-July 2014 IBR participants, PAYE participants, and REPAYE

participants with only undergraduate loans to only 17 years. And it has reduced the 25-year monthly-

payment requirement for ICR participants, pre-July 2014 IBR participants, and REPAYE participants

to only 22 years.

65. In doing so, the Department made loan cancellation under IDR comparatively more

attractive than forgiveness under PSLF. For affected borrowers enrolled in a 20-year IDR plan, instead

of receiving forgiveness 10 years faster under PSLF, they receive forgiveness only 7 years faster.15 And

instead of saving 120 monthly payments under PSLF, they save only 84 monthly payments, as

compared to IDR.

14 A qualifying monthly payment counts toward PSLF only if it was made while the borrower was working for a public
service employer. 20 U.S.C. § 1087e(m)(1)(B).
15 The Department did not grant the 3.6 million affected IDR borrowers forbearance credits toward PSLF’s 10-year

payment-and-service requirement. Presumably, this is because these affected borrowers were not employed at a public
service employer during their periods of forbearance.

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66. For borrowers enrolled in a 25-year IDR plan, instead of receiving forgiveness 15

years faster under PSLF, they receive forgiveness only 12 years faster. And instead of saving 180

monthly payments under PSLF, they save only 144 monthly payments, as compared to IDR.

67. In both cases, the advantage of PSLF forgiveness over IDR forgiveness in terms of

speed is reduced by three years. And the advantage of PSLF forgiveness over IDR forgiveness in

terms of financial value is reduced by 36 monthly payments.

68. The incentive for the 3.6 million borrowers affected by the One-Time Account

Adjustment to seek PSLF forgiveness by working for a public service employer is thus reduced.

69. For the 804,000 borrowers whose total debt of $39 billion will be cancelled starting on

August 13, their incentive to seek PSLF forgiveness by working for a public service employer is

eliminated entirely.

70. This disincentive to participate in PSLF injures public service employers, including

Plaintiffs, that depend on PSLF incentives to recruit and retain college-educated employees.

CLAIMS FOR RELIEF

Count I: Violation of the Appropriations Clause in Article I § 9 of the U.S. Constitution

71. Plaintiffs reallege and incorporate by reference the foregoing allegations as if fully set

forth herein.

72. Article I, § 9, of the Constitution provides: “No Money shall be drawn from the

Treasury, but in Consequence of Appropriations made by Law.” This Clause is intended “to assure

that public funds will be spent according to the letter of the difficult judgments reached by Congress

as to the common good and not according to the individual favor of Government agents or the

individual pleas of litigants.” OPM v. Richmond, 496 U.S. 414, 428 (1990). Accordingly, “no money can

be paid out of the Treasury unless it has been appropriated by an act of Congress.” Id. at 424 (quoting

Cincinnati Soap Co. v. United States, 301 U.S. 308, 321 (1937)).

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73. Debt instruments held by the United States count as “Money” that shall not be drawn

without Congressional appropriation. Cancelling such debt is an appropriation that must be

authorized by Congress.

74. Congress statutorily required PSLF debtors to make 120 qualifying monthly loan

payments in order to qualify for loan forgiveness under the program. Congress did not authorize

canceling the outstanding loan balances of PSLF debtors who make fewer than 120 qualifying monthly

payments. 20 U.S.C. § 1087e(m).

75. Nor did Congress authorize canceling the debt of borrowers who did not make

qualifying monthly payments (or were in economic hardship deferment) during the 20-or-25-year

repayment period of an IDR plan.

76. Crediting forbearance as qualifying “monthly payments” for the purpose of PSLF and

IDR forgiveness results in cancellation of debt that Congress did not authorize, in violation of the

Appropriations Clause.

77. This unauthorized cancellation of debt includes the Department’s plan to cancel $39

billion in loans owed by 804,000 borrowers starting August 13, 2023.

Count II: Violation of the Administrative Procedure Act—Exceeding Statutory Authority

78. Plaintiffs reallege and incorporate by reference the foregoing allegations as if fully set

forth herein.

79. The Department is an agency subject to the requirements of the Administrative

Procedure Act (APA). See 5. U.S.C. § 551(1).

80. The One-Time Account Adjustment to PSLF and IDR programs is a final agency

action that is subject to judicial review under the APA.

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81. Under the APA, a court must “hold unlawful and set aside agency action” that is “in

excess of statutory jurisdiction [or] authority.” 5 U.S.C. § 706(2).

82. “It is axiomatic that an administrative agency’s power to promulgate legislative

regulations is limited to the authority delegated by Congress.” Bowen v. Georgetown Univ. Hosp., 488 U.S.

204, 208 (1988). Thus, “an agency literally has no power to act … unless and until Congress confers

power upon it.” La. Pub. Serv. Comm’n v. FCC, 476 U.S. 355, 374 (1986).

83. There is no statutory authority to credit non-payments during periods of loan

forbearance toward the 120-monthly-payment requirement for debt forgiveness under PSLF.

20 U.S.C. § 1087e(m). Rather, only monthly payments under a qualifying repayment plan count. Ibid.

84. Because the One-Time Account Adjustment purports to credit non-payments during

periods of forbearance toward PSLF’s monthly-payment requirement, it exceeds Defendants’

statutory authority and should be set aside and enjoined.

85. There is no statutory authority to credit non-payments during periods of forbearance

toward the repayment period needed for debt forgiveness under IBR. 20 U.S.C. § 1098e(b)(7). Rather,

only “monthly payments” under a qualifying repayment plan or “deferment due to economic

hardship” count. Ibid.

86. There is no statutory authority to credit non-payments during periods of forbearance

toward the “period of time for which an income contingent repayment plan … may be in effect.”

20 U.S.C. § 1087e(e)(7). Rather, only “monthly payments” under a qualifying repayment plan or

“deferment due to economic hardship” may count. Ibid.

87. Because the One-Time Account Adjustment purports to credit non-payments during

periods of forbearance toward the repayment period of IDR plans (both IBR and ICR), it exceeds

Defendants’ statutory authority and should be set aside and enjoined.

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88. The Department’s plan to cancel $39 billion in debt owed by 804,000 borrowers

starting August 13, 2023, based on the One-Time Account Adjustment, is not authorized by statute

and thus must be enjoined (or set aside after the fact).

Count III: Violation of the APA—Arbitrary and Capricious Agency Action

89. Plaintiffs reallege and incorporate by reference the foregoing allegations as if fully set

forth herein.

90. Under the APA, a reviewing court shall “hold unlawful and set aside agency action,

findings, and conclusions found to be … arbitrary, capricious, an abuse of discretion, or otherwise

not in accordance with law.” 5 U.S.C. § 706(2)(A).

91. Agency action is arbitrary and capricious if the agency fails to “examine the relevant

data and articulate a satisfactory explanation for its action including a rational connection between the

facts found and the choice made.” Motor Vehicle Mfrs. Ass’n of U.S., Inc. v. State Farm Mut. Auto. Ins. Co.,

463 U.S. 29, 43 (1983) (cleaned up).

92. A departure from prior policy is arbitrary and capricious unless the agency “assess[es]

whether there were reliance interests [in that prior policy], determine whether they were significant,

and weigh any such interests against competing policy concerns.” DHS v. Regents of the Univ. of Cal.,

140 S. Ct. 1891, 1915 (2020).

93. Defendants have failed to explain why it has changed its policy from not crediting

non-payments during periods of loan forbearance to crediting such payments for purposes of PSLF

and IDR forgiveness. They likewise did not identify legal authority for such a change. Nor did they

consider the reliance interests of public service employers in receiving full benefits from PSLF.

94. Agency action is also arbitrary and capricious if the agency failed to consider costs and

benefits. State Farm, 463 U.S. at 54-55; cf. Michigan v. EPA, 576 U.S. 743, 752 (2016) (“One would not

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say that it is even rational, never mind ‘appropriate,’ to impose billions of dollars in economic costs in

return for a few dollars in … benefits.”).

95. Defendants have entirely failed to consider the cost to taxpayers of crediting periods

of forbearance toward PSLF and IDR forgiveness.

96. Granting 3.6 million borrowers with three years’ credit toward IDR forgiveness means

those borrowers will make approximately 130 million fewer monthly payments to the Treasury than

they otherwise would before having their debt completely cancelled. Defendants did not even attempt

to estimate this cost, let alone weigh costs and benefits.

97. Nor did Defendants consider the financial cost of accelerating PSLF forgiveness—

including immediately cancelling the loans of over 40,000 borrowers.

98. Defendants also failed to consider non-financial costs in terms of fundamental

fairness. They did not consider, for example, why certain college graduates who took on student debt

obligations voluntarily should be excused from making at least 130 million monthly payments on their

outstanding student loans when their non-college-educated peers receive no comparable benefit yet

face, on average, greater economic challenges. Congress is empowered to legislate such unfairness if

it so chooses under most circumstances, but federal agencies do not enjoy the same latitude.

99. By crediting non-payments during periods of loan forbearance as payments toward

PSLF and IDR loan forgiveness, the One-Time Account Adjustment is arbitrary and capricious and

should be set aside and enjoined.

Count IV: Violation of the APA—Failure to Observe Procedure Required by Law

100. Plaintiffs reallege and incorporate by reference the foregoing allegations as if fully set

forth herein.

101. Under the APA, courts must “hold unlawful and set aside agency action” that is

“without observance of procedure required by law.” 5 U.S.C. § 706(2)(D).

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102. The APA requires administrative agencies to undertake notice-and-comment

rulemaking when engaging in substantive decision-making. Id. § 533.

103. Under notice-and-comment procedures: (1) “the agency must issue a ‘[g]eneral notice

of proposed rule making,’ ordinarily by publication in the Federal Register”; (2) “the agency must ‘give

interested persons an opportunity to participate in the rule making through submission of written

data, views, or arguments’”; and (3) “it must include in the rule’s text ‘a concise general statement of

[its] basis and purpose.’” Perez v. Mortg. Bankers Ass’n, 575 U.S. 92, 96 (2015) (alterations in original)

(quoting 5 U.S.C. § 533). The APA also requires “publication … of a substantive rule [to] be made

not less than 30 days before its effective date.” 5 U.S.C. § 553(d).

104. Additionally, the HEA requires Defendants to follow negotiated rulemaking

procedures to “obtain the advice of and recommendations from individuals and representatives of the

groups involved in student financial assistance programs” when developing regulations that affect

federal student assistance. 20 U.S.C. § 1098a(a)(1).

105. The One-Time Account Adjustment affects the legal rights of at least 3.6 million

individual borrowers. It will cost taxpayers at least $39 billion to cancel the debt owed to the Treasury

by 804,000 of those borrowers, and the cost will only rise as the remaining 2.8 million affected

borrowers have their debt cancelled because of that agency action.

106. The One-Time Account Adjustment is indisputably a substantive final agency action

that requires Defendants to follow notice-and-comment and negotiated rulemaking procedures. The

Department instead issued it as a press release, making a mockery of proper administrative procedure.

107. Defendants failed to observe procedures required by law and therefore the One-Time

Account Adjustment should be set aside and enjoined.

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RELIEF REQUESTED

WHEREFORE, Plaintiffs respectfully request this Court to declare Defendants’ One-Time

Account Adjustment to be unlawful, to enjoin its implementation, and to set it aside. Specifically,

Plaintiffs request this Court to find Defendants have committed the violations alleged and described

above, and to enter the following:

A. A declaratory judgment that Defendants’ One-Time Account Adjustment announced on April

19, 2022, violates the Appropriations Clause of the Constitution;

B. A declaratory judgment that Defendants’ One-Time Account Adjustment is not authorized

by the HEA or any other statute;

C. A declaratory judgment that the One-Time Account Adjustment violates the APA;

D. A judgment setting aside the One-Time Account Adjustment;

E. An injunction requiring Defendants to stop crediting non-payments during periods of loan

forbearance as monthly payments under PSLF, and to stop cancelling debt under PSLF for

student-loan debtors who have made qualifying payments while working for a public service

employer for less than 10 years, where such cancellation is not authorized by statute;

F. An injunction requiring Defendants to stop crediting non-payments during periods of loan

forbearance as monthly payments (or economic hardship deferment) under IDR, and to stop

cancelling debt under IDR where such cancellation is not authorized by statute;

G. An injunction to stop Defendants from cancelling $39 billion in debt that is not authorized by

statute;

H. An order setting aside the cancellation of $39 billion in debt to the extent such cancellation

occurs before an injunction could issue;

I. An award of attorneys’ fees and costs;

J. Any other relief as the Court deems just and equitable.

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JURY DEMAND

Plaintiffs demand a trial by jury of any triable issues.

August 04, 2023 Respectfully submitted,

/s/ Sheng Li
SHENG LI (D.C. BAR NO. 90001962)
Litigation Counsel
RUSSELL G. RYAN
Senior Litigation Counsel
NEW CIVIL LIBERTIES ALLIANCE
1225 19th Street NW, Suite 450
Washington, DC 20036
(202) 869-5210
[email protected]

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