Student Loan Borrowers Denied Access to Affordable Repayment Options

For the time being, federal student loan borrowers cannot apply for income-driven repayment plans, a long-standing safety net that adjusts monthly payments based on household income, while the U.S. Education Department assesses a recent federal court decision.

Last week, the department suspended applications for these repayment plans after the U.S. Court of Appeals for the Eighth Circuit not only upheld but also broadened a temporary halt on the Saving on a Valuable Education program, known as SAVE.

This income-driven initiative is a key aspect of the Biden administration’s agenda, with eight million borrowers enrolled, and it offered lower payments compared to previous plans. Due to its substantial costs, SAVE faced two distinct legal challenges last spring from Republican-led states, which claimed the Biden administration exceeded its legal authority.

The SAVE plan has remained in legal uncertainty since, with participants’ payments paused since last summer. However, applications for the other three older income-driven plans, previously unaffected by litigation, were also disabled last week. This effectively halted access to more affordable repayment options for borrowers in need and removed a vital element for participating in the Public Service Loan Forgiveness program—albeit temporarily.

A spokesperson for the Education Department stated on Thursday, “The department is currently reviewing repayment applications to comply with the Eighth Circuit’s ruling,” and mentioned updated information for borrowers available on StudentAid.gov, including details surrounding court actions on SAVE.

Here’s what we know at this moment. The situation remains dynamic, and we’ll provide updates as things evolve.

What happened recently?

The U.S. Court of Appeals for the Eighth Circuit upheld a temporary prohibition on part of the SAVE plan set by the U.S. District Court for the Eastern District of Missouri. The appeals court remanded the case to the District Court, instructing an expansion of the preliminary injunction to cover the entire SAVE regulation, even though other legal decisions had already suspended the program temporarily.

Moreover, the appellate court indicated that the Secretary of the Department of Education doesn’t possess the explicit authority to provide loan forgiveness under any Income-Contingent Repayment plans, a practice that has been standard for over three decades. Borrowers make payments equivalent to a percentage of their discretionary income, varying by plan, with remaining balances typically canceled after a designated period of 20 to 25 years.

“This represents a significant shift in how this statute has been interpreted and managed for almost 30 years,” commented Michele Zampini, senior director of college affordability at the Institute for College Access and Success, a research and advocacy organization.

The Education Department has placed a notice on its website indicating that the injunction barred it from administering SAVE and certain aspects of other income-driven schemes, resulting in the unavailability of applications for these plans and online loan consolidations.

It’s crucial to note that the ruling is not definitive and that legal proceedings are ongoing, said Abby Shafroth, director of the National Consumer Law Center’s Student Loan Borrower Assistance Project. “However, the ruling raises significant concerns for borrowers who rely on the SAVE program to manage their payments and strive toward debt elimination,” she added.

What should we expect next?

Scott Buchanan, executive director of the Student Loan Servicing Alliance, an industry lobby, expressed expectation that applications for at least one of the income-driven plans, specifically Income-Based Repayment, would be reopened “as soon as feasible.”

The situation is complex: The Income-Based Repayment plan was established under a July 2009 statute that explicitly authorizes loan cancellation at the end of the repayment period, whereas SAVE operates under regulations derived from a 1993 law. The states that initiated the lawsuit contended that loan cancellation wasn’t explicitly authorized under that older law, and the appellate court aligned with that interpretation.

Nevertheless, the department has utilized that authority to create three preceding income-driven programs before SAVE, each progressively enhancing the previous plans: Income-Contingent Repayment launched in 1994; Pay as You Earn (PAYE) introduced in 2012; and Revised Pay as You Earn (REPAYE) rolled out in 2015 before being succeeded by SAVE.

Are applications for income-driven repayment currently being processed?

No, the processing of all applications has been temporarily suspended, according to Mr. Buchanan from the alliance. He noted that loan servicers were directed to halt income-driven and loan consolidation application processing for three months, although he anticipated receiving further guidance in the upcoming weeks.

Monthly payments continue to be collected on the other existing income-driven plans (such as Income-Based Repayment, Pay as You Earn, and Income-Contingent Repayment), while borrowers enrolled in SAVE remain in an interest-free forbearance as the legal proceedings advance.

Is the Public Service Loan Forgiveness program still operational?

Yes, the Public Service Loan Forgiveness program remains available for government and nonprofit employees, including public school teachers, librarians, and public defenders. Following 120 qualifying payments, any outstanding balance is erased.

However, there is currently a significant hurdle: Most borrowers need to be enrolled in an income-driven repayment plan to qualify for loan cancellation, and at present, applications for any of those plans cannot be submitted.

If you are already in a qualifying repayment plan and become newly eligible for the public service program (for instance, due to a new job), you can still enroll. Nevertheless, if you’re in the SAVE plan, where payments have been suspended because of the ongoing litigation, your qualifying payments have also been paused, inhibiting any progress toward forgiveness.

This public service program, enacted into law by President George W. Bush in 2007, is not currently at risk, and experts in student loans suggest there is little push to dismantle this popular program, as doing so would require congressional approval.

What if I’m nearing the end of my payments in the public service program but find myself stuck in the SAVE plan?

Over two million individuals are enrolled in the public service program, with many approaching qualification for cancellation: 21,700 borrowers have made enough payments to qualify, while 330,100 have completed between 97 and 119 qualifying payments as of December 31, based on data from the Education Department’s Federal Student Aid office.

Currently, borrowers enrolled in the SAVE program and nearing enough qualifying payments have limited options.

“Borrowers trapped in SAVE can either wait for the I.D.R. applications to reopen and switch to an alternative I.D.R. plan,” stated Betsy Mayotte, president of the Institute of Student Loan Advisors, a resource offering free guidance to borrowers. “Or they can remain in the SAVE forbearance and plan to utilize what’s known as ‘buy back’ to receive credit for those months once they have verified 120 months of qualifying employment.”

Through the buy back option, borrowers will need to make payments for the months during which their payments were paused in forbearance. Given the complex history of the program and the prevalence of borrowers facing challenging situations trying to achieve forgiveness, it’s crucial to document everything—your employment history with eligible employers, all qualifying payments, recertification applications, and more.

What alternatives do I have if I’m unable to afford payments (due to job loss or other reasons)?

There are options besides income-driven repayment plans that can typically be requested through your loan servicer or payment manager. Borrowers may temporarily halt payments via deferments or forbearance, though the requirements and consequences vary, especially regarding interest handling.

“Borrowers may qualify for deferments based on economic hardship or unemployment,” Ms. Mayotte noted from the Institute of Student Loan Advisors. “Forbearances generally apply in situations of less defined financial difficulty.”

Other repayment plans can help reduce monthly payments: graduated repayment starts lower and increases over time, and extended repayment lowers monthly obligations by lengthening the loan term.

Simply consolidating your loans can also reduce your monthly payments by stretching the repayment timeline, although there are drawbacks. You may incur a higher interest rate on your total debt and may end up paying more over time.

Moreover, Ms. Shafroth, of the law center, cautioned against consolidating until it’s determined whether recent legal developments will impede all income-driven repayment frameworks introduced in 2023. Those regulations included provisions safeguarding borrowers from losing credit for payments towards cancellation of income-driven loans. Prior to this rule, consolidating loans reset that progress.

Will I face penalties if I am unable to recertify my loans?

Annually, borrowers in income-driven repayment plans must recertify their income or face adverse outcomes, including removal from the repayment plan. However, these applications are currently not available.

At present, this is not a concern, according to Mr. Buchanan. The loan servicers have been instructed to extend recertification deadlines on a monthly basis and will communicate with borrowers once they receive clearer direction from the Education Department.

Will the Trump administration cease defending the SAVE plan in court?

That would appear logical. However, several student loan experts suggest that the administration might have strategic motives for maintaining SAVE’s status, at least temporarily. The Republicans might aim to modify the program through a substantial budget package that Congress plans to pass using a process called reconciliation, allowing them to capture and reduce SAVEs projected expenses to finance other initiatives.

“There are connections between this and reconciliation; it seems they are attempting to legislate SAVE off the books to fund tax cuts for billionaires rather than terminating the program through the courts,” stated Persis Yu, deputy executive director of the Student Borrower Protection Center, an advocacy organization.

The Education Department did not provide immediate comments.

If I’m in a program like SAVE that might be discontinued, will I be grandfathered in?

It is difficult to predict the outcome. When the Biden administration transitioned from the REPAYE income-driven repayment plan to the SAVE program, REPAYE participants were automatically transferred to the new plan, which offered better terms.

Nonetheless, it may pose challenges to retract benefits. “It’s premature to make definitive statements,” remarked Ms. Shafroth from the law center. “Current borrowers may maintain contractual rights to the essential benefits within these programs, regardless of their enrollment status.”

That may explain why proposals aimed at simplifying income-driven programs typically include provisions to grandfather existing borrowers while limiting the changes to new participants.