The student loan company that could topple Biden’s debt relief plan

The fate of President Joe Biden’s multibillion-dollar student debt relief plan could hinge on an obscure financial services company just outside of St. Louis.

The Missouri Higher Education Loan Authority, a state-created loan company known as MOHELA, is at the center of a legal challenge from six Republican states trying to stop Biden’s plan to forgive student loan debt for more than 40 million Americans.

The lawsuit, which is set to go before the Supreme Court next year, will decide the future of one of Biden’s biggest and most contentious domestic policy programs. But it’s also shining a spotlight on MOHELA, which has quietly emerged as one of the nation’s largest student loan servicers while deepening its ties to the Education Department over the past decade.

MOHELA now manages the accounts of nearly 7 million federal student loan borrowers, more than double what it had two years ago. Last yea,r it brought in more than $130 million in revenue, the bulk of which came from its federal contract to service student loans.

MOHELA, like the Education Department’s other loan servicers, had been moving ahead with implementing the Biden administration’s debt relief until it was halted by the courts in November. The company had gone so far as to finalize a letter — co-branded with both MOHELA and federal logos — notifying borrowers that their debt relief request had been completed, according to documents obtained by POLITICO under a public records request.

But, at the same time, MOHELA has been drawn into the fight against student debt relief by Missouri Attorney General Eric Schmitt, one of the lead plaintiffs in the multi-state lawsuit, even though the company is not a party to the case.

The other states pursuing the legal challenge include Nebraska, Iowa, South Carolina, Kansas and Arkansas. They claim Biden’s debt relief plan will harm them in a range of ways, such as lowering tax revenue or diminishing the value of investments tied to student loans.

But it’s Missouri's portion of the case, asserting financial harm to MOHELA, that has occupied much of the attention from legal observers and lower courts.

Missouri argues that MOHELA will lose money under Biden’s relief plan because it’ll have fewer accounts to manage. Less revenue for the company, Missouri says, will make it more difficult for MOHELA to make required payments to a state fund that helps its public colleges and universities.

Seizing on the harm to loan servicers that work for the Education Department, like MOHELA, was “the best opportunity to bring a successful lawsuit,” said Phil Kerpen, a conservative political organizer who leads American Commitment and was an early proponent of the strategy and circulated the idea in conservative circles.

All of the loan servicers hired by the Education Department decided against suing over the debt relief plan. MOHELA presented a different situation, Kerpen noted, because of the company's relationship to a state with a Republican attorney general who could take action on its behalf.

When Biden first announced his plan to forgive student debt in August, Republicans and conservative groups vowed to bring legal challenges to the policy. But finding a plaintiff who would have a concrete injury that allows them to bring a lawsuit was a major challenge.

MOHELA’s role in the case has brought fresh criticism from some Democrats and consumer advocacy groups.

Rep. Cori Bush, the progressive Democrat whose district neighbors the company’s Chesterfield, Mo. headquarters, for instance, blasted MOHELA for what she called an “unconscionable” effort to stop debt relief. MOHELA, she added in a statement to POLITICO, is “a proxy for the six conservative attorneys general” to challenge the administration’s debt relief program and “would profit off this challenge’s success.”

MOHELA responded to Bush’s criticism last month by appearing to distance itself from the lawsuit. The company explained in a letter to Bush that its “executives were not involved” with the Missouri attorney general’s decision to file a lawsuit.

With much at stake for the company’s federal loan servicing business, MOHELA officials from the company have also sought to reassure Democratic congressional aides and Biden administration officials that they were not involved in the Missouri attorney general’s lawsuit seeking to block debt relief, according to people familiar with the conversations.

MOHELA did not respond to a request for comment for this story. Company executives haven’t detailed publicly — in court or otherwise — how they expect Biden’s debt relief would affect the company. Some of their competitors in the industry have forecast some type of financial hit if the plan moves ahead.

Progressives object to the idea that the interests of any Education Department contractor would be used to overturn an administration’s student loan policy.

“It’s not just that this could derail debt cancellation, but it sets up a dynamic where the legal status of these contractors creates veto points in the student loan system that allows it to become even more partisan and more dysfunctional,” said Mike Pierce, the executive director of the Student Borrower Protection Center. “Ultimately borrowers are going to pay the price for that.”

For decades after it was created by Missouri lawmakers in 1981, MOHELA made student loans that were guaranteed by the federal government. That changed when President Barack Obama in 2010 signed legislation to scrap the program, which Democrats viewed as a wasteful giveaway to lenders. In response to concerns state entities like MOHELA would go out of business, Congress required the Education Department to set aside new loan servicing contracts for those companies.

“I think no one thought through the politics of that, and here we are 12 years later and the cost of that patronage may kill debt cancellation for tens of millions of people,” Pierce said.

MOHELA has drastically expanded its loan-servicing business since it received an initial Education Department contract in 2011 to service about 100,000 federal student loans, winning additional contracts and new business from the agency. As of August, MOHELA managed the accounts of 6.7 million borrowers on behalf of the Education Department. It also services the accounts of an additional 330,000 borrowers of private loans.

The large expansion followed the company’s effort to beef up its Washington presence. Over the past decade or so, the company began hiring an outside firm to lobby Congress and the Education Department. And it established a D.C. office in the same building complex that houses the Education Department's Office of Federal Student Aid.

On Capitol Hill, MOHELA has benefited from having Missouri Sen. Roy Blunt as the top GOP appropriator overseeing education funding. Senate appropriators have repeatedly added language to government funding bills that effectively require the Education Department to keep companies like MOHELA in the mix as the agency has tried to overhaul its student loan servicing contracts over the past several years.

MOHELA has also managed to stay relatively clear of controversy as Democrats and progressives sharply criticized the student loan servicing industry in recent years. It avoided the fate of some larger companies, like Navient and FedLoan Servicing, which were dogged by federal and state lawsuits and investigations into their loan servicing practices.

The Biden administration last year renewed MOHELA’s loan servicing contract through 2023. It also awarded the company millions of new accounts by designating it the new exclusive contractor to manage the Public Service Loan Forgiveness program, which cancels the debt of public service employees after 10 years. Fixing the long-troubled program, which had previously been operated by FedLoan Servicing, has been a major priority of Democrats.

MOHELA’s role in the debt relief lawsuit so far has been mixed for the GOP states pursuing the case. In October, a federal judge in St. Louis tossed out the GOP states’ lawsuit, finding that MOHELA was too far removed from the state of Missouri for the attorney general to sue on its behalf. The judge ruled that the other states also lacked standing.

But a federal appeals court in November took a different approach. “Due to MOHELA’s financial obligations to the State treasury, the challenged student loan debt cancellation presents a threatened financial harm to the State of Missouri,” a three-judge panel of the 8th Circuit Court of Appeals unanimously concluded.

The Supreme Court will now consider whether the states have standing to bring their lawsuit when it hears the case in February or March. That will determine whether the justices end up reaching a decision on the legality of the administration’s plan under the emergency authority the Education Department claims it has to cancel debt for millions as a response to the Covid-19 pandemic.

The justices have also agreed to hear a second case that’s based on whether two borrowers are able to sue because they were deprived of the opportunity to submit public comments on the policy.

Advocates for debt relief, though, acknowledge that the battle to defend the administration’s program extend beyond MOHELA. A loss at the Supreme Court is also likely to spur new calls for Biden to try another legal authority to cancel student debt.

“Ultimately, MOHELA is not a plaintiff in this case,” Bush said. “The pressure should be applied on the attorneys general to drop the case, the Supreme Court to rule in favor of the people who stand to benefit from this relief, and the Biden Administration to continue using its legal authority to ensure student debt relief is swiftly delivered to borrowers.”