A student-loan company that took over public servants' accounts is involved in one of the first major lawsuits against Biden's debt cancellation

• Six GOP-led states filed a Missouri-based lawsuit over Biden's student-loan forgiveness.
• Missouri houses MOHELA, a student-loan firm that recently took over some federal borrower accounts.

As a student-loan company works to take over millions of borrower accounts, it's playing a role in a lawsuit over President Joe Biden's recently announced student-loan forgiveness.

Last week, six GOP-led states filed a lawsuit in Missouri against Biden's announcement of up to $20,000 in federal debt cancellation. The state houses the Higher Education Loan Authority of the State of Missouri, a student-loan company also known as MOHELA. Long before Biden announced any broad debt relief, the student-loan industry was facing a shake-up as three loan companies announced they would be ending their federal contracts. That required the transfer of millions of accounts to new entities that would service the loans.

FedLoan Servicing, which previously held loans within the Public Service Loan Forgiveness program, was one of the companies ending its federal servicing, and those accounts were transferred to MOHELA — which appears to be the focus of the GOP-led lawsuit. According to the filing, the states say the loan servicer is facing a "number of ongoing financial harms" to its business, referring specifically to the Federal Family Education Loan program, a privately held loan guaranteed by the government that would not qualify for Biden's debt relief without consolidation into the direct-loan program.

The lawsuit argues that pushing Federal Family Education Loan borrowers to consolidate will result in a loss of revenue for MOHELA. In response, Biden decided that borrowers within that program would not be able to qualify for his one-time student-loan forgiveness.

While that decision did make it more difficult for the GOP attorneys general to prevail, they also said in the suit that canceling direct student loans — federal loans that qualify for Biden's relief plan — would harm MOHELA's business operations.

"MOHELA faces the imminent loss of revenue in its role as a servicer of DLP (Direct Loan Program) loans," the lawsuit says. "MOHELA's revenue as a servicer of DLP loans is a function of the number of accounts it services. So when student loan balances go to zero, as they will en masse under the Mass Debt Cancellation, MOHELA will lose the revenue from servicing those loans."

Ahead of Biden's announcement, there was speculation regarding the entities, or individuals, that would pursue legal action against the debt relief. Jack Remondi, the CEO of the major student-loan company Navient, said last month that he wouldn't sue the administration even though his company "clearly has standing." And Abby Shafroth, the staff attorney at the National Consumer Law Center, told Insider it would be difficult for loan companies to sue given they made their money through contracts with the federal government.

For now, the lawsuit is set for a hearing in front of a federal judge this month to determine next steps — but advocates and Democratic lawmakers are confident nothing will come of it.

"This suit is just the latest chapter in a long history of student loan companies like MOHELA and their Republican allies cheating people with student debt out of their rights," Mike Pierce, the executive director of the advocacy group Student Borrower Protection Center, said in a statement.

"Governments have given billions of dollars to companies like MOHELA since they were created by state legislatures decades ago," Pierce added. "This must end now. As President Biden cancels student debt for tens of millions, state governments need to pull the plug on their failed experiments with student lending and unwind student loan companies like MOHELA."