The Education Department has released new, updated guidance on repayment and student loan forgiveness for borrowers impacted by the ongoing SAVE plan litigation.
The SAVE plan debuted last fall as a new income-driven repayment plan. Touted by Biden administration officials as the most affordable IDR plan ever created, the program features reduced payments, a generous interest benefit that wipes out excess interest accrual, and several different pathways to eventual loan forgiveness after anywhere from 10 to 25 years in repayment. More than eight million borrowers signed up for SAVE or were automatically switched over from the earlier REPAYE plan.
But nine months after the program was launched, a coalition of Republican-led states filed a lawsuit, alleging that the Biden administration exceeded congressional authority is establishing this new initiative. Administration officials countered that the Education Department has had the legal authority to create the parameters of IDR plans since Congress first passed enabling legislation more than 30 years ago.
In August, the 8th Circuit Court of Appeals issued an injunction blocking the SAVE plan and preventing the Education Department from implementing most of its features including lower payments, the interest subsidy, and any loan forgiveness. The litigation has also cast doubt on the future of loan forgiveness under several other IDR plans. Meanwhile, millions of borrowers have been forced into a forbearance. While there are no payments and no interest during the forbearance, the period won’t count toward student loan forgiveness under either IDR or Public Service Loan Forgiveness.
This week, the Education Department released updated guidance for the SAVE plan injunction and the associated forbearance, with big implications for student loan forgiveness under IDR plans in general.
Student Loan Forgiveness Is Blocked Not Just For The SAVE Plan, But Also For ICR And PAYE
The Education Department confirmed in its new guidance what many borrower advocates and legal experts had suspected: the 8th Circuit’s sweeping injunction doesn’t just impact student loan forgiveness under the SAVE plan. It also has blocked loan forgiveness under several other IDR plans derived from the same legal authority.
While it was only the SAVE Plan that was targeted by the Republican-led coalition of states, the legal authority the Education Department relied on to create SAVE was established by Congress through a provision of the Higher Education Act in 1993. Congress broadly authorized the creation of IDR plans (then called Income-Continent Repayment plans), with the only requirement that payments be tied to a borrower’s income, and that the repayment term be no longer than 25 years. It was widely understood that at the end of that 25-year term, borrowers would receive loan forgiveness for any remaining balance.
Subsequently, as directed by the Higher Education Act, the Education Department then drafted detailed regulations in 1994 to establish the first official IDR plan, which was called ICR. And those regulations expressly authorized loan forgiveness at the end of the plan’s 25 year term. The department later used that same regulatory process to create the PAYE plan in 2012, the REPAYE plan in 2015, and finally the SAVE plan in 2023.
Separately from these ICR-derived plans, Congress passed distinct laws in 2007 and 2010 creating yet another set of IDR plans: Income-Based Repayment, or IBR plans. IBR plans are very similar to ICR, PAYE, REPAYE, and SAVE at a basic level, in that they use a formula applied to the borrower’s income and family size, with a cap on the length of the repayment term. But in the legislation creating IBR plans, Congress expressly authorized loan forgiveness at the end of the 20- or 25-year terms.
Republican-led challengers have seized on this distinction to argue that Congress intended for student loan forgiveness to happen at the end of IBR terms, but not at the end of ICR-derived IDR plans (despite legislative history and context to the contrary), and that the 30-year old regulations derived from this statutory authority that establish IDR loan forgiveness are effectively illegal.
The 8th Circuit’s injunction issued in August appeared to block student loan forgiveness not just under the SAVE plan, but under all IDR plans that were established under the same 1993 legal authority. This week, the Education Confirmed that this is the case. According to the new guidance, the department cannot authorize student loan forgiveness under the ICR, PAYE, REPAYE, or SAVE plans while the 8th Circuit’s injunction remains in effect.
Borrowers can continue to make payments under ICR and PAYE (while SAVE borrowers remain in a forbearance), and payments under those plans should continue to count toward PSLF.
Student Loan Forgiveness Under IBR Is Intact, But Other Borrowers Will Go Into Forbearance At The End Of Repayment Term
The Education Department did affirm that because of IBR’s separate legal authorization, student loan forgiveness under IBR is not blocked under the 8th Circuit’s injunction. Indeed, in its written order, the court expressly singled out IBR student loan forgiveness after 20 or 25 years as clearly authorized by Congress, in contrast to what it determined to be “ambiguity” for the ICR-derived IDR plans created through Education Department regulations like ICR, PAYE, REPAYE, and SAVE.
Under IBR, borrowers who reach the 20- or 25-year threshold for student loan forgiveness will receive a discharge, says the department. But borrowers who reach the milestone for loan forgiveness under ICR, PAYE, and the SAVE plan will instead be placed into an interest-free forbearance while the litigation continues.
Court Order Could Impact Student Loan Forgiveness Under IDR Account Adjustment
Concerningly, the Education Department’s conclusions suggest that borrowers expecting to receive student loan forgiveness under the IDR Account Adjustment may encounter complications. The account adjustment is a one-time initiative designed to provide borrowers with retroactive IDR credit to rectify longstanding historical problems with these plans, including misinformation and poor recordkeeping. Under the adjustment, which is expected to be completed soon, many borrowers may advance their progress toward eventual IDR student loan forgiveness, with some borrowers reaching the threshold for immediate discharge.
But if the Education Department is blocked for now from implementing student loan forgiveness under ICR, PAYE, and SAVE, borrowers who are enrolled in those plans will not receive an immediate discharge, says the guidance — even under the IDR Account Adjustment. Instead, they will be put into an interest-free forbearance while the litigation continues.
To get IDR student loan forgiveness, these borrowers may need to switch to the IBR plan. Importantly, payments made under other IDR plans (including ICR, PAYE, REPAYE, and SAVE) can count toward the 20- or 25-year student loan forgiveness term for IBR. So even if a borrower got, say, 24 years and 11 months of loan forgiveness credit under the ICR plan, switching to IBR in that final month should allow the borrower to qualify for a discharge of their balance. The newest Education Department guidance indicates that IDR processing is starting to resume, so borrowers can apply to change plans (but expect long delays).
However, IBR has its own problems. Payments under IBR may be much more expensive than other IDR options like the SAVE plan. Some borrowers may not qualify for the IBR plan, such as Parent PLUS borrowers or those who don’t have a “partial financial hardship” as defined by the program rules. And IBR has none of the interest benefits that the SAVE plan does, meaning borrowers’ balances may increase under IBR due to interest accrual, and that interest can potentially be capitalized under certain circumstances.
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