It could be well into next year before some student loan borrowers make a payment
After court rulings upended several student loan repayment plans and debt forgiveness, the Education Department said Monday that payments could be paused for at least six months for millions of borrowers.
The department is scrambling to adjust to an injunction, in a lawsuit brought by Republican-led states, that has barred the Biden administration from moving forward with the Saving on a Valuable Education program, commonly known as Save. Biden launched the program last fall to provide borrowers with lower monthly payments and a faster path to loan cancellation. Since then, more than 8 million people have enrolled and 400,000 have already had their debts wiped away.
The court ruling not only put the Save plan on ice but also made it difficult for borrowers to enroll in other income-driven plans and for the Education Department to forgive debt through those plans. Now, the department is reconfiguring its system to adjust to the terms of the injunction, a process that it says could take several months, and taking steps to give borrowers who have been stuck in limbo more options.
Here’s what you need to know.
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What is the Save plan?
Save is an amended version of an existing income-driven repayment plan known as Revised Pay as You Earn, or Repaye. Income-driven plans cap monthly payments at a percentage of a borrower’s earnings and extend repayment periods from the standard 10 years to as long as 25 years, with the promise of forgiving the balance at the end of that term. Payments are based on a percentage of discretionary income, typically whatever a person earns above 150 percent of the federal poverty line.
Save stands out from existing plans in a few important ways. It raises the amount of income shielded from the calculation of payments from 150 percent to 225 percent of the federal poverty line. The plan also caps payments for undergraduate loans to 5 percent of income above that 225 percent threshold, instead of 10 percent. People with debt from undergraduate and graduate studies will pay a weighted average between 5 percent and 10 percent.
If you borrowed $12,000 or less for undergrad or graduate school, Save aims to provide loan forgiveness after you make payments for a decade instead of for 20 or 25 years. You can also skip having to manually recertify your income under Save if you agree to have the Education Department automatically access your latest tax return from the Internal Revenue Service.
Although the plan was set to take full effect July 1, lawsuits were filed to stop the Biden administration from implementing several features ahead of time, including raising the amount of income shielded and canceling the debts of borrowers who took out small loans.
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Why was Biden’s Save plan blocked?
In the spring, groups of Republican-led states filed separate lawsuits alleging that the president exceeded his legal authority by creating a program with far-reaching economic impact. The Congressional Budget Office estimates Save will cost some $230 billion over the next decade, but the Biden administration says the figure is closer to $156 billion. The states also argued that the forgiveness portion of the plan would deprive them of tax revenue and, in the case of Missouri, earnings from servicing loans.
In June, federal judges thought that those arguments had enough merit to continue the cases and impose temporary injunctions on parts of the plan while the lawsuits proceed.
In Missouri, U.S. District Judge John A. Ross had blocked the department in June from carrying out any further loan forgiveness under the Save plan. The agency has already approved $5.5 billion in loan cancellation for 414,000 enrollees who met the plan’s criteria of originally borrowing less than $12,000 and paying the debt down for at least 10 years.
Ross agreed with Missouri Attorney General Andrew Bailey and five other Republican-led states that Biden probably lacks the authority to erase debts through the Save plan. He also agreed that the loan-forgiveness component would harm the Missouri Higher Education Loan Authority, a quasi-state agency that services federal student loans and funds state scholarships. It is the same claim used to topple Biden’s sweeping student loan forgiveness program, which the Supreme Court struck down in 2023.
Dissatisfied with the partial injunction, Bailey petitioned the U.S. Court of Appeals for the 8th Circuit to halt the Save plan in its entirety amid ongoing litigation. The court agreed and stopped any component of the program from moving forward.
The 8th Circuit declined to clarify the scope of the injunction, leading the Biden administration to petition the Supreme Court to either narrow the order or quickly take up the case itself. The justices declined to act and said the court expects the 8th Circuit will “render its decision with appropriate dispatch.” But the Biden administration is still waiting for the appeals court to rule.
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How does the injunction affect other repayment plans?
Older income-driven plans have been swept up in the Save chaos because they were created under the same authority in the Higher Education Act. In 1993, Congress said the education secretary must offer repayment plans tied to a borrower’s income and capped repayment to no more than 25 years. Lawmakers directed the department to flesh out the details, resulting in the introduction of Income Contingent Repayment (ICR) in 1994, Pay As You Earn (PAYE) in 2012 and Repaye in 2015 - the predecessor of Save.
All of the plans offered loan forgiveness. Each new one was more generous than the last, with newer plans offering shorter repayment periods and lower payments. Missouri and six other states say the 1993 statute did not authorize loan forgiveness. In its order, the appeals court appeared to agree and enjoined the Education Department from any further forgiveness for any borrower whose loans are governed “in whole or in part” by the statute.
Without clarification from the appeals court, the Education Department has hit the brakes on Save and provisions of other income-driven plans. One IDR plan - income-based repayment - was spared because it was enacted separately by Congress in 2007.
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Can I still apply for the Save plan?
Yes, the Education Department said student loan borrowers still can enroll in Save. But as a result of the injunction, the government has directed its loan servicers to temporarily pause the processing of income-driven repayment applications. The department said borrowers should expect a lengthy delay in the processing of applications.
In the meantime, those borrowers will be placed in an interest-free forbearance, postponing their payments while the department reprograms its systems to adhere to the terms of the court order. That process could take six months or longer, according to the department.
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I’m already enrolled in Save. What happens now?
For people already enrolled in the plan and anyone who has applied, student loans have been placed in an interest-free forbearance, postponing their payments while the court case continues. Time spent in this forbearance does not count toward Public Service Loan Forgiveness or the loan cancellation afforded under income-driven repayment.
On Monday, the Education Department said Save enrollees will remain in forbearance for six more months or longer as the agency works with its contractors to update their systems to align with the restrictions imposed by the court. The department expects the update will take time because it requires significant changes to numerous systems used by several agency contractors.
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What’s happening with the other repayment plans caught up in the injunction?
The department will soon resume processing applications for borrowers applying for income-based repayment and some borrowers applying for PAYE or ICR. It has reinstated a simplified version of the online application, after taking down the form for months and requiring borrowers submit a paper version.
People who are close to meeting the 120 payment threshold for public service loan forgiveness may want to switch into the IBR plan to get credit toward debt relief, the department advises. The same is true for people who are close to meeting the 20 or 25 years in repayment needed to have their balances cleared through older income-driven plans.
The department also will reopen the PAYE and ICR repayment plans to new enrollees through regulatory action this fall. To streamline the suite of income-driven plans, the department had previously closed enrollment to wind down the two older options when it created Save. But with Save in jeopardy, the federal agency wants to give borrowers options to earn credit for loan forgiveness.
The department said reopening PAYE, in particular, will be the fastest path for public servants who want to keep working toward forgiveness. The agency will share more in the coming weeks on the timeline for the repayment plan change.
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What does this all mean for loan forgiveness?
Forgiveness as a feature of any income-driven plan created by the department - Save, PAYE and ICR - is on hold. People who hit their plan’s repayment milestone for forgiveness under those plans will be moved into an interest-free forbearance, if they are not already in a forbearance as a result of the litigation. The department will still process loan forgiveness for the income-based plan that is not subject to the court injunction.
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