With the recent news that the Education Department has restored online access to the Income-Driven Repayment plan application and resumed processing, borrowers who are stuck in SAVE Plan limbo now have a possible alternative pathway to pursuing student loan forgiveness.
For two months now, borrowers in the SAVE plan have been in a forced forbearance due to a nationwide injunction. The SAVE plan is a new IDR plan, launched last year, that reduces monthly payments, stops runaway interest accrual, and provides for eventual student loan forgiveness. The injunction, issued by the 8th Circuit Court of Appeals, blocks the SAVE program while a legal challenge against the Biden administration continues. The challengers in that lawsuit – a coalition of Republican state officials, led by Missouri – contend that the SAVE plan is an illegal overreach by the Biden administration. But administration officials and borrower advocates counter that the SAVE plan falls squarely within the legal authority conferred by Congress under a provision of the Higher Education Act enacted more than 30 years ago.
At least than eight million borrowers are now in the SAVE plan forbearance, according to the Education Department. During this forbearance, borrowers do not have to make payments on their federal student loans. In addition, no interest will accrue on their balances. But the time won’t count toward student loan forgiveness under IDR plans or Public Service Loan Forgiveness, a related program for people working in nonprofit or government jobs. The forbearance could last well into 2025, as any final ruling from the 8th Circuit is likely to get appealed to the U.S. Supreme Court.
With the online IDR application now back up after two months (during which IDR processing had been suspended while the Education Department worked to comply with the 8th Circuit’s injunction), borrowers impacted by the SAVE plan forbearance now have a new option to consider: leaving the SAVE plan altogether for another IDR program. But such a move may not make sense for everyone.
3 Reasons To Leave The SAVE Plan And Switch To IBR
According to the Education Department, most borrowers considering switching to a different IDR plan essentially only have one alternative option: Income-Based Repayment, or IBR. The department has phased out new enrollments for the older Income-Contingent Repayment plan (except for consolidated Parent PLUS loans) as well as Pay As You Earn. There could be several reasons for borrowers to consider leaving the SAVE plan, and the associated forbearance, and switching to IBR.
Resume Progress Toward Student Loan Forgiveness Through PSLF
Since the SAVE plan forbearance period does not count toward student loan forgiveness under the PSLF program, PSLF borrowers could switch to IBR to resume progress. IBR is a qualifying repayment plan for PSLF, just like SAVE. This could be particularly important for borrowers who are close to the end of the 120 qualifying payments – the equivalent of 10 years – required to become eligible for loan forgiveness under PSLF.
Resume Progress Toward Student Loan Forgiveness Under IDR
Similarly, the SAVE plan forbearance also does not count toward student loan forgiveness under IDR plans. Borrowers typically can qualify for loan forgivingness through IDR after 20 or 25 years of payments. To resume progress, borrowers can apply to switch to the IBR plan.
This may be important for those who are nearing the end of their 20- or 25-year IDR loan forgiveness term. In addition, borrowers who anticipate receiving enough retroactive IDR credit under the IDR Account Adjustment – which is expected to be completed soon – may also want to consider switching to IBR because the 8th Circuit’s broad injunction appears to block student loan forgiveness for any borrower who is enrolled in SAVE, even if they would qualify under a different program. While the Education Department has not expressly said so, the breadth of court order could impact the ability of the department to enact student loan forgiveness under the IDR Account Adjustment for those presently enrolled in SAVE.
Maintain More Certainty About Student Loan Forgiveness
The SAVE plan legal challenge is not just limited to SAVE itself. The 8th Circuit is considering legal arguments brought by the Republican state challengers that student loan forgiveness shouldn’t just be blocked for the SAVE plan, but also for other IDR plans that were enacted under the same provision of the Higher Education Act. This would include the ICR, PAYE, and REPAYE plans. If the 8th Circuit adopts the states’ arguments, student loan forgiveness at the end of 20 or 25 years could be blocked for all of these programs.
But IBR is different. The states concede that Congress established the IBR plan through distinct legislation, and statutory text makes clear that lawmakers expressly authorized student loan forgiveness at the end of the IBR repayment term. Furthermore, payments made under other IDR plans would count toward loan forgiveness under the IBR statute. Even the 8th Circuit seems to agree that there is no ambiguity that student loan forgiveness is allowable under IBR.
Congress could subsequently repeal or change the IBR statute, and that’s not impossible to do. But such a move could be deeply unpopular, and would be difficult to enact without unified Republican control of all branches of the federal government.
Thus, borrowers looking for more certainty may want to consider switching to IBR.
4 Reasons To Stay In The SAVE Plan And Not Switch To IBR
But switching to the IBR plan will not be the right move for everyone, and could some with some serious downsides.
Student Loan Payments May Be Higher Under IBR
The lowest-income borrowers may not see much of a change to their student loan payment amounts by switching from the SAVE Plan to IBR. In particular, borrowers who earn income under 150% of the federal poverty limit for their family size would have a zero dollar monthly payment under the SAVE plan, during the SAVE plan forbearance, and under IBR.
But for borrowers with higher incomes, the differences in monthly payments between SAVE and IBR could be significant. First, given that no payments are due during the SAVE plan forbearance, at a minimum it means going from no payment obligation to some sort of payment obligation. But just comparing SAVE plan payments with IBR payments, borrowers may be surprised by a big jump in the amount. A single borrower making $75,000 annually would have SAVE plan payments of around $345 per month, but that same borrower pay around $655 per month under IBR, if they took out their student loans prior to July 2014.
Borrowers who make too much money may not even be able to enroll in IBR. While the SAVE plan is available for any Direct federal student loan borrower (other than Parent PLUS loans), IBR has a “partial financial hardship” requirement. This means that higher-income borrowers cannot enroll in IBR if their calculated payment under the plan would be at least as much as the amount needed repay the loan in full on a 10-year term.
Significant Student Loan Interest Downsides Of IBR
In addition, there are some important interest-related considerations to switching out of the SAVE plan and into IBR.
First, IBR does not have the SAVE plan’s generous interest subsidy that waives excess interest for borrowers whose monthly payments are below the amount of interest accrual. Under SAVE, if a borrower’s payments does not cover monthly interest, the difference is cancelled. Under IBR, it is not. That means that borrowers may see their loan balances increase over time under IBR if they are underwater on interest.
In addition, borrowers who switch into IBR should be aware that if they subsequently leave IBR, any outstanding interest will be capitalized, meaning it would be added to the loan principal balance. This can have a compounding effect over time.
PSLF Borrowers May Have Other Options To Get Student Loan Forgiveness Credit
Borrowers who are pursuing PSLF may have alternative options to get student loan forgiveness credit without having to switch to the IBR plan. These include:
- Remaining in the SAVE Plan forbearance and subsequently applying for PSLF Buyback, a new program that allows borrowers to make a lump sum payment after having 120 months of certified PSLF employment for prior deferment or forbearance periods that did not count toward PSLF;
- Switching to the 10-year Standard plan, which also counts toward PSLF and is not based on income;
- Switching to an economic hardship deferment or a qualifying military deferment or forbearance, which can count toward PSLF under new rules that went into effect last year.
PSLF borrowers will want to take careful look at their options to determine whether switching to IBR makes sense or not.
Uncertainties About The Future Of the SAVE Plan
Because the SAVE plan is embroiled in legal challenges, and those challenges are still ongoing, it is impossible to know with any certainty what may happen in the future. To muddy the waters even more, there is an upcoming election in November, which could ultimately determine the fate of the SAVE plan and other student loan forgiveness programs.
There is certainly a distinct possibility that the SAVE plan gets struck down by the courts, in which case borrowers’ only alternative option may be IBR, anyway. But what happens if, say, the SAVE plan winds up being upheld by the courts, and borrowers can easily resume payments under that program? Those who left the program for IBR should be able to get back in, but only after incurring potentially unnecessary and costly consequences such as higher payments and interest capitalization.
Conversely, what happens if, under a new president and a new Congress, SAVE is codified through a new statute, or the Education Department changes its position to allow the SAVE plan forbearance period to count toward student loan forgiveness? Those who changed plans to IBR may regret missing out on these benefits by changing plans.
Bottom Line For Student Loan Borrowers Struggling With SAVE Plan issues
For some borrowers, switching to IBR may be the right move. It can allow people to resume progress toward student loan forgiveness under IDR and PSLF, and potentially still provide affordable monthly payments.
But for others, the picture is more complicated. Changing over to the IBR plan may come with some significant downsides. And given the uncertainty surrounding the future of the SAVE plan, as well as the upcoming national elections, the right move for some borrowers may be to stay put for now.