When a current borrower acquired a Federal Direct Loan from the federal government, the borrower signed a Master Promissory Note (“MPN”) which promised, among other things, eligibility for Public Service Loan Forgiveness (“PSLF”) upon the completion of certain conditions. In short, the current borrower maintains a contract with the federal government for PSLF. So if Congress passed a law that disrupted a contractual promise, i.e. PSLF, with current borrowers, does a claim for breach of contract exist?
When the government is a party to a contract, it is known as a “public contract” (as opposed to a “private contract”) and special rules apply. First, according to the Supreme Court, the government must consent to being sued, even in the event the government breaches a contract. The Tucker Act serves as the federal government’s consent to being sued for breach of contract. However, that statute only allows the government to consent to being sued for money damages, and thus the government cannot be compelled to complete a breached contract or required to stop the activity that led to the breached contract.
Second, the government has “sovereign defenses” that are not available to non-government parties. The two primary “sovereign defenses” are the (1) unmistakability doctrine, and (2) sovereign acts doctrine.
The two sovereign defenses, while technically separate defenses, typically work hand-in-hand. This is because courts will, in most cases, examine the defenses together. The way that these defenses work is best understood with an example.
David is a current borrower with loans covered by an MPN promising PSLF. In 2017, Congress passes an act repealing PSLF for current borrowers. This same year, David satisfies the requirements for PSLF and seeks to have his remaining loans forgiven. His request is denied. David then files a lawsuit in federal court alleging that the federal government has breached their contract with David by failing to forgive his loan balance. As usually happens, the federal government admits they breached the contract but argues that David is ineligible for damages because of ”sovereign defenses.”
The federal court in their analysis would first apply the “sovereign acts doctrine” defense. This defense would bar David’s claim if the government could prove that Congress’ new law is a “sovereign act.” A “sovereign act” is a law that is “public and general,” i.e. (1) designed to benefit the public welfare, (2) not designed to or does not have the primary effect of helping the government avoid its contractual obligations to current borrowers under PSLF, and (3) does not place the majority of the impact of the law on current borrowers under contract with the federal government.
If the court determined the law to not be a “sovereign act,” then the court would ignore the “unmistakability doctrine” defense, and allow David to proceed with his claim. While a court could decide either way on the issue, recent case law does exist where courts have held that new laws affecting repayment provisions on existing loan contracts to not be “sovereign acts.”
However, if the court determined the law to be a “sovereign act,” then the court would proceed with an analysis under the “unmistakability doctrine” defense. Under this defense, the court would look at David’s MPN to see whether or not the contract contained a provision that “unmistakably” confirmed that the government intended that the terms of the agreement not be affected by future laws. As no MPNs contain such a provision, the “unmistakability doctrine” defense would likely bar David’s contract claim from moving forward.
All in all, the reality is this: The Tucker Act makes the government eligible for breach of contract claims for damages. In the event Congress passes a law removing PSLF for current borrowers, and thus breaching MPNs, the success or failure of a borrower’s ability to bring such a claim likely comes down to whether or not courts consider such a law to be a “sovereign act.”
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Kenneth Strickland is the Student Debt Specialist at Equal Justice Works, where he works to ensure that public interest legal jobs remain accessible to all who desire them through engaging in education, outreach, and policy analysis centered around ensuring that an affordable legal education remains an option for everyone. Ken is a recent graduate from the University of North Carolina School of Law, and has worked with reputable public service organizations such as North Carolina Advocates for Justice, American Civil Liberties of North Carolina, and the North Carolina Poverty Research Fund.