A huge number of student loan borrowers may need to change their repayment plan this year, as federal courts and Congress make moves that could fundamentally reshape the federal student loan system. And many of these borrowers may experience an increase in their monthly payments as a result.
The assault on the current federal student loan repayment system is happening on two fronts. Earlier this week, a federal appeals court issued a sweeping decision that signaled that the SAVE plan, as well as student loan forgiveness under two other income-driven repayment plans, are likely to get struck down. Meanwhile, congressional Republicans are moving forward to develop cost-cutting plans to offset the massive costs of extending and expanding tax cuts; squarely in the GOP crosshairs are these very same programs.
If these repayment plans are overturned, repealed, or fundamentally changed, many federal student loan borrowers will have no choice but to switch to a different, more expensive repayment plan. And the additional costs could be significant.
SAVE Plan And IDR Student Loan Forgiveness On The Cusp Of Getting Struck Down
On Tuesday, the 8th Circuit Court of Appeals issued a significant ruling in the ongoing litigation over the SAVE plan, a Biden-era income-driven repayment, or IDR, plan.
Like all IDR plans, the SAVE plan utilizes a formula applied to a borrower’s income and family size to calculate a unique, affordable monthly payment, with eventual student loan forgiveness after a set period of time (in most cases, after 20 or 25 years). But SAVE is more generous than other IDR plans and features lower payments, interest benefits, and fast-tracked loan forgiveness for certain borrowers. A coalition of Republican-led states filed a lawsuit last spring to halt the program, arguing that it exceeds what Congress authorized when it first enacted legislation creating IDR plans more than 30 years ago.
In its ruling this week, the 8th Circuit extended and expanded a preliminary injunction blocking the SAVE plan. As a result, millions of borrowers enrolled in SAVE who have been placed in a forbearance will continue to have no payments due and no interest accruing, but the time will also continue to not count toward student loan forgiveness for IDR plans and also for Public Service Loan Forgiveness, or PSLF — a related program that can wipe out a borrower’s balance in as little as 10 years if they work full-time for qualifying nonprofit or public employers.
But the 8th Circuit’s ruling went even further, also extending an injunction blocking student loan forgiveness under two other IDR plans that were created through the same legal process as SAVE: the ICR plan, and the PAYE plan. While these two plans remain open, student loan forgiveness at the end of 20 or 25 years is blocked for both plans. And the decision signaled in no uncertain terms that the court is likely to strike down loan forgiveness under ICR and PAYE. That would upend decades of regulations, loan contracts, and public guidance assuring borrowers that they would be entitled to student loan forgiveness after fulfilling their repayment obligations under these IDR plans.
Congress Is Poised To Repeal Student Loan Forgiveness Under IDR Plans
Meanwhile, Congress may take steps to fundamentally change federal student loan repayment plans and eliminate IDR student loan forgiveness altogether.
According to a House Budget Committee memo circulated several weeks ago, Republican lawmakers are evaluating a number of proposals to cut federal spending to offset trillions of dollars in costs associated with extending tax cuts. Squarely on the chopping block is the SAVE plan. But Congress may also move to repeal all of the other current IDR plans as well.
In place of these plans would be a new IDR option. That is good news for borrowers to some extent, as it would mean that there would still be an option to repay student loans based on income. However, this new IDR option would not feature any student loan forgiveness after 20 or 25 years, or any other set period of time at all. Instead, borrowers could only receive loan forgiveness once they have paid at least the total amount that they would have otherwise paid if they had enrolled in a 10-year Standard repayment plan. Many lower-income borrowers would never pay this amount, meaning they could be trapped in student loan debt for the rest of their lives. Republicans are also evaluating possible changes to PSLF eligibility, although no specifics have been provided yet.
Under the most recent version of the proposal, the changes would only apply to new loans taken out after June 2024. This could mean that borrowers currently in repayment would be able to continue accessing the existing repayment plan options – but only to the extent that those plans survive the legal challenge pending before the 8th Circuit Court of Appeals. The proposals by Republican lawmakers have not yet been finalized, and may not be for several more weeks at least.
Many Student Loan Borrowers May Need To Change Repayment Plans
Taken together, these threats to IDR programs may mean that many federal student loan borrowers will need to consider changing repayment plans. At least eight million borrowers are enrolled in SAVE alone, with additional borrowers currently repaying their student loans under the ICR and PAYE plans.
The Income-Based Repayment plan, known as IBR, may be the most realistic alternative option for most borrowers. Assuming the SAVE plan gets struck down or repealed, and student loan forgiveness under ICR and PAYE goes away as well, IBR would be the only way for borrowers in an IDR program to receive student loan forgiveness. IBR is not currently subject to a legal challenge, and because it was created by Congress through separate legislation that unambiguously allows for student loan forgiveness, even the 8th Circuit found that loan forgiveness is permissible through IBR. And many borrowers may be relieved to know that payments made under SAVE, ICR, and PAYE will count toward the loan forgiveness term under IBR — so switching plans should not reset the clock.
For borrowers on track for student loan forgiveness through PSLF, the landscape is a little more complicated. Just like IBR, PSLF is not currently subject to a legal challenge, and there is no dispute that loan forgiveness is permissible through this program. Under the PSLF statute and the governing regulations, payments made under all of the IDR plans can count toward loan forgiveness for PSLF. While SAVE is likely to get repealed or struck down, there is a possibility that borrowers on track for PSLF can continue to repay their loans under PAYE or ICR, even if loan forgiveness for those plans at the end of 20 or 25 years ultimately gets struck down (provided the plans themselves remain intact). IBR should also continue to be an option, provided Congress would allow current borrowers to be grandfathered in if they repeal it.
Student Loan Payments Made Be Higher After Changing Repayment Plans
But changing repayment plans, either because of the 8th Circuit legal challenge or anticipated Congressional action, will likely result in higher payments for many student loan borrowers. This is particularly true for millions of borrowers in the SAVE plan, given that the repayment formulas for all other IDR options are more expensive.
“For the average borrower, the House Republican proposal would increase monthly student loan payments by almost $200,” according to research by The Institute For College Access and Success, or TICAS. “A borrower with average income for a recent Bachelor’s degree graduate would see payments increase by $193 per month.”
The changes could hit lower-income borrowers especially hard. “The House Republican proposal requires monthly payments at a lower income threshold, thereby protecting less income for basic needs,” says TICAS. “A borrower with a $30,000 annual income (less than $700 monthly discretionary income) will need to pay $54 per month or fall into delinquency.” And without any student loan forgiveness at the end of a fixed repayment term, lower-income borrowers would experience “a lifetime sentence of student loan debt.”
Higher-income borrowers could see even more significant changes to their monthly payments. A borrower earning $100,000 per year who took out undergraduate student loans before 2014 would have payments of around $270 per month under SAVE. But if they have to switch to IBR, their payments would skyrocket to nearly $1,000 per month. Other higher-income borrowers may not even be able to enroll in IBR if their income is too high due to the program’s partial financial hardship requirement — which could leave borrowers who spent years working toward eventual student loan forgiveness with no end in sight.
And Parent PLUS borrowers could be even worse off. ICR is typically the only IDR option available for Parent PLUS loans, a type of student loan provided to the parent of an undergraduate student. If ICR student loan forgiveness at the end of 25-years gets struck down or repealed, Parent PLUS borrowers may have no other viable repayment option, and no other way of discharging their student loans. Many of these borrowers may default as a result.