What happens next with Biden’s student loan repayment plan?
President Biden’s new student loan repayment plan was thrown into disarray Monday after two federal judges in Kansas and Missouri issued separate rulings that temporarily blocked some of the plan’s benefits, raising questions about its fate.
The preliminary orders, which suspend parts of the SAVE program, leave millions of borrowers in limbo until a decision is made on lawsuits filed by two groups of Republican-led states challenging the plan’s legality.
That means the Biden administration won’t be able to cut borrowers’ monthly bills in half starting July 1, as planned, and will have to pause debt forgiveness for SAVE participants. The government has forgiven $5.5 billion in debt for more than 414,000 borrowers through the plan, which launched in August.
If you’re among the eight million borrowers making payments through SAVE (the Saving on a Valuable Education plan), you probably have a lot of questions. Here’s what we know so far, although the Ministry of Education hasn’t released official guidance yet.
Let’s back up a bit. What does SAVE do?
Like the income-driven repayment plans that came before it, the SAVE program ties borrowers’ monthly payments to their income and family size. After payments are made for a set period of years, usually 20 or 25 years, any remaining debt is forgiven.
But the SAVE plan, which replaced the revised Pay as You Earn (REPAYE) program, is more generous than its predecessors in several ways.
Once the plan was fully in effect, payments for undergraduate borrowers would be reduced from 10 percent to 5 percent of their discretionary income. (People with college debt pay 10 percent of discretionary income, and for borrowers with both types, payments are weighted accordingly.)
SAVE also reduces the need for borrowers to deduct income from their payment calculations and shortens the repayment period for borrowers with smaller loan balances.
Which SAVE benefits were terminated by the rulings?
The components of SAVE were rolled out in phases, with parts not yet in effect being suspended (due to the Kansas judge’s ruling). They included the reduction in payments from 10 percent to 5 percent of discretionary income, which was set to take effect July 1.
The Missouri judge’s order blocks any new debt forgiveness achieved through the SAVE program. But borrower advocates and student loan experts said that part of the ruling was ambiguous, and that it was unclear how broadly the provision should be interpreted.
A spokeswoman for the Education Ministry said it was still studying the statements.
SAVE also offers a shorter path to loan forgiveness for participants with smaller loan balances. But that benefit will no longer apply to those with debt remaining at the end of that shortened term — which can be as short as 10 years — now that a Missouri judge has blocked forgiveness.
Which parts of SAVE will be retained?
If you are enrolled in SAVE, your payment will not change for the time being.
The SAVE plan already lowered payments because the formula allows borrowers to keep more of their income to pay for basic necessities, making them ineligible for the repayment formula.
As it stands now, borrowers (with student loans) pay 10 percent of their income above that protected amount, or 225 percent of the poverty threshold. (That means single people making about $15 an hour or less would no longer have to pay anything at all.) Under the previous REPAYE plan, borrowers paid 10 percent of income above 150 percent of the federal poverty threshold. The broader threshold remains.
Interest treatment. The favorable treatment of interest in the SAVE plan does not appear to be affected by the court’s rulings for the time being. In other words, if a borrower’s monthly payment does not cover all of the interest owed that month, the Department of Education will continue to forgive the unfunded portion, preventing the debt from growing, at least for now.
“While we continue to review these rulings, the SAVE plan still means lower monthly payments for millions of borrowers,” Education Secretary Miguel Cardona said in a statement, “including more than four million borrowers who owe no payments at all, and protections for borrowers facing runaway interest rates as they make their monthly payments.”
What happens if I am already registered with SAVE?
You can stay enrolled in SAVE and keep your current monthly payment even if it is $0 (which more than four million lower-income borrowers qualify for).
Can I still register for SAVE if I haven’t already?
Yes.
“While we review the rulings, borrowers can still enroll in the SAVE plan,” the Federal Student Aid office said on its website. “We will share more information with borrowers soon.”
My loans have been placed in an administrative moratorium while my SAVE payment has been adjusted. What happens now?
Millions of borrowers were set to see their loan amounts decrease after the final terms of the SAVE plan took effect on July 1, but their lenders imposed an administrative moratorium while the new monthly payments were calculated.
With that payment cut frozen, it’s unclear what will happen next. But it’s reasonable to assume that payments will remain the same — that is, on amounts that use only the more generous discretionary income formula. But it could take some time for lenders to work that out and for payments to resume.
My remaining debt has already been forgiven through the SAVE plan. Will that relief be reversed?
No. “Neither the Kansas judge nor the Missouri judge wanted to claw back the benefits the department had already provided to borrowers under the SAVE plan,” said Adam Samaha, a professor at New York University law school. “So much of the government’s initiative seems safe for now.”
What should I do if I am making payments through the SAVE plan but also participating in the Public Service Loan Forgiveness Program?
The Missouri ruling prevents new loan forgiveness under SAVE.
But student loan experts said they did not believe this would affect borrowers who make payments through SAVE but are also enrolled in the Public Service Loan Forgiveness program, which pays the balances of eligible public sector workers and can eliminate nonprofits after 120 payments.
“It does not block PSLF,” said Mark Kantrowitz, an expert on student financial aid, and “it does not retroactively block waivers already granted.”
If these statements were only made in two states, why do they apply to the entire country?
Kansas federal Judge Daniel D. Crabtree said earlier this month that only three states in the lawsuit there — South Carolina, Texas and Alaska — had legal standing to bring the case. And Judge Crabtree declined to finalize the parts of the SAVE plan that were already operational.
But in his order, he wrote that “a broad rule, such as the SAVE plan, requires a broad order given the compelling need for nationwide uniformity in the Department’s administration of student loan programs.”
What does the Biden administration plan to do?
It clearly disagrees with the district court’s rulings, noting that the Department of Education has relied on its authority under the Higher Education Act to implement income-driven repayment plans three times over the past thirty years.
“We will not stop defending SAVE, the most affordable reimbursement plan in history, against attacks from Republican elected officials,” Cardona said. Xthe social media platform, adding that it will appeal the rulings of the two states.
What happens next – and what does this mean for the future of SAVE?
The fact that two Obama-appointed federal judges were willing to grant nationwide injunctions based on claims brought by at least some states challenging the SAVE program may seem worrisome to borrowers enrolled in the plan. But the injunctions are only temporary, and it’s still hard to predict how things will play out in these early stages.
“A preliminary injunction is still an injunction; it is a court order and must be taken seriously,” said Professor Samaha. “But it is preliminary and there are indications in these orders that the justices are willing to reconsider their positions.”
The Justice Department’s appeal will be heard by two different federal appeals courts: the Eighth Circuit (which includes Missouri) and the Tenth Circuit (which includes Kansas), Professor Samaha explained.
From there, all sorts of different situations can play out: The appeals courts — which typically randomly assign cases to three-panel judges — can review the parties’ arguments and decide to leave the preliminary injunctions in place, vacate them or issue their own version of relief as the cases move toward final judgment, he added. If there are disagreements at the district or appeals court level, the case is more likely to end up before the U.S. Supreme Court.
