Last month, a federal appeals court issued an order blocking student loan forgiveness and reduced payments under a signature Biden administration initiative. But the broad scope of that order, and the Education Department’s actions to implement it, are causing chaos across the federal student loan system.
The Biden administration established the SAVE plan using longstanding authority under the Higher Education Act that allows for the creation of income-contingent repayment plans (which are now broadly referred to as “income-driven repayment” or IDR plans). But SAVE goes further than previous IDR plans and features a more generous repayment formula, a larger initial income exemption, a waiver of excess interest, and faster loan forgiveness for certain people. In response, a group of Republican-led states filed a legal challenge to stop the program. And in August, the 8th Circuit Court of Appeals agreed to do so. While the litigation is continuing and SAVE has not technically been struck down, the fate of the program is in doubt.
The 8th Circuit’s order required the Education Department to immediately stop implementing the SAVE plan. As a result, the department needed to place more than eight million borrowers who had enrolled in SAVE, or were converted from its predecessor plan (REPAYE), into a forbearance. The department indicated it also needed to pause IDR processing and take down online IDR and Direct consolidation applications in order to update its systems to ensure borrowers were unable to enroll in SAVE, which would have been in violation of the court order.
Taken together, these actions are increasingly causing chaos for student loan borrowers, many of whom did not even enroll in SAVE or were automatically converted from REPAYE. And the problems could not be coming at a worse time, as several key federal student loan relief initiatives are coming to an end.
Student Loan Forgiveness Caught In The Crosshairs Of SAVE Plan Litigation
The 8th Circuit’s order blocking the SAVE plan, issued at the request of the Republican-led states (with Missouri at the head of the pack), doesn’t just block student loan forgiveness under SAVE. The order appears to block any borrower enrolled in SAVE from receiving student loan forgiveness. That distinction is important, because it suggests that the Education Department cannot discharge the student debt of any borrower if they happen to be enrolled in the SAVE plan, even if they are entitled to loan forgiveness under other debt relief programs that are not subject to a legal challenge (such as Public Service Loan Forgiveness).
The Biden administration filed a formal motion with the 8th Circuit to clarify the scope of the injunction. But the 8th Circuit denied the motion, without any explanation. The administration then appealed to the U.S. Supreme Court, asking the court to pause or reverse the 8th Circuit’s “vastly overbroad” order. But the U.S. Supreme Court rejected the appeal. So the Education Department is now stuck.
Student Loan Forgiveness Under Other IDR Plans Also Now At Risk
It’s not just student loan forgiveness for SAVE plan borrowers that is at risk. In its order last month, the 8th Circuit suggested that student loan forgiveness under other IDR plans that were created using the same legal authority could also get struck down. This includes the Income-Contingent Repayment plan, Pay As You Earn, and SAVE’s predecessor plan, Revised Pay As You Earn. Another IDR plan called Income-Based Repayment was passed under separate legislation, which the 8th Circuit is not questioning at this time.
For more than 30 years, federal regulations have authorized student loan forgiveness for ICR and the related plans under this legal authority. Democratic and Republican administrations alike have guided borrowers into these programs with the promise of loan forgiveness after no more than 25 years of payments. Federal student promissory notes, which contain applicable terms and conditions, specifically note that borrowers are entitled to student loan forgiveness under these programs. But the 8th Circuit is threatening to strike this down, suggesting that Congress could have been more clear when it passed the authorization statute in 1993, like it did for programs like IBR and PSLF (which expressly authorize loan forgiveness).
Briefing before the 8th Circuit is ongoing, and oral arguments are scheduled for late October.
Student Loan Forgiveness Under IDR Account Adjustment May Be Delayed
The 8th Circuit’s order may also be impacting the Education Department’s ability to finalize implementation of the IDR Account Adjustment. This key initiative is designed to rectify past issues with IDR programs by awarding borrowers credit toward IDR loan forgiveness for periods that didn’t count before. At least $50 billion in student loan forgiveness has already been approved.
The Education Department had indicated that it was set to finalize implementation of the program by September 1. But that date has now passed, and the initiative appears to have stalled, at least for now.
To be clear, the IDR Account Adjustment itself is not part of the legal challenge before the 8th Circuit. A separate legal challenge was filed last year to block the program, but that lawsuit was dismissed, and a different appeals court upheld the dismissal. But the Education Department may be struggling with how to implement the account adjustment given the ongoing litigation involving the SAVE plan, which has now expanded to jeopardize loan forgiveness under ICR and PAYE, as well.
So far, the department has just added a brief note to its IDR Account Adjustment guidance, saying, “A federal court issued an injunction preventing the U.S. Department of Education from implementing parts of the Saving on a Valuable Education (SAVE) Plan and other IDR plans. We are assessing the ruling and will continue to update StudentAid.gov/saveaction with more information. Note: The information presented on this page related to income-driven repayment plans, including the SAVE Plan, may not be accurate at this time.”
IDR Processing Pause Causing Issues Beyond SAVE Plan
Meanwhile, the 8th Circuit’s order is having ripple effects throughout the IDR system.
Borrowers who were enrolled in SAVE and are now subject to the SAVE plan forbearance should be able to switch to another IDR plan, like IBR, and the Education Department’s published guidance says they can do so (although they may have to apply on paper while the online application remains down). But due to the ongoing IDR processing pause, these borrowers will simply be put into a forbearance until processing resumes, and the department warns that there will be lengthy delays.
The issues are now starting to impact borrowers who have nothing to do with SAVE. For example, borrowers who recently consolidated their loans (perhaps to take advantage of the IDR Account Adjustment benefit) are currently unable to enroll in an IDR plan due to the processing pause. These borrowers are faced with a difficult choice of either making what might be unaffordable payments under a Standard or Extended plan, or applying for IDR and being put into a forbearance. The Education Department says interest accrual should stop after 60 days of forbearance, although it’s too soon to know if that is being implemented correctly by loan servicers.
Borrowers who have been paying their loans under other IDR plans are also starting to receive notices that they have to recertify their income, which is typically required annually. But if IDR processing is on pause, these borrowers will not be able to recertify their income. The Education Department has provided no guidance on what these borrowers should do, and what they should expect as the chaos continues. Typically, borrowers who fail to recertify their income on time would see a dramatic increase in their monthly payment.
These developments come as two Biden administration initiatives designed to provide relief to borrowers who miss payments on their student loans or are in default are coming to an end on September 30. With these protections gone in October, there is an increasing possibility that borrowers struggling to navigate the IDR system in its current state will fall behind on their loans and go into default.