The Biden administration is preparing to reopen two student loan repayment plans as soon as next week. The move could provide more options for borrowers seeking student loan forgiveness.
Since August, at least eight million of borrowers have been in repayment purgatory due to a legal challenge targeting the SAVE plan. SAVE is the latest in a series of income-driven repayment, or IDR, options that tie a borrower’s monthly payment to their income and family size. SAVE was designed to be far more beneficial and affordable than older IDR plans, with lower payments, a generous interest subsidy, and loan forgiveness in 20 or 25 years (and in some cases even less). Given this, the Biden administration opted to phase out two older IDR options for new enrollees to simplify the federal student loan repayment system.
But with the SAVE plan still blocked and likely to get struck down or repealed by the incoming Trump administration, the Biden administration initiated a process in November to resurrect these two IDR options: Income-Contingent Repayment, or ICR, and Pay As You Earn, or PAYE. Both of these plans could come back as soon as next week. Here’s what borrowers should know.
SAVE Plan’s Lower Payments And Student Loan Forgiveness Unlikely To Return
Since August, when the 8th Circuit Court of Appeals granted an injunction blocking the SAVE plan following a legal challenge brought by a group of Republican-led states, the Education Department has been prevented from implementing nearly all elements of the SAVE plan. As a result, borrowers who had enrolled in, or applied to, SAVE have been put into a forbearance.
No payments are due while in the forbearance, and no interest is accruing on loan balances. But the period isn’t counting toward student loan forgiveness. This includes not just the typical 20- or 25-year loan forgiveness terms for IDR plans, but also Public Service Loan Forgiveness. PSLF can eliminate the federal student loan debt for borrowers in as little as 10 years if they work in qualifying nonprofit or public sector employment.
Because of the SAVE plan forbearance, millions of borrowers are effectively stuck, and their student loan forgiveness progress has been paused. And if SAVE ultimately gets struck down or repealed — which seems increasingly likely — many borrowers will have only one alternative IDR option: Income Based Repayment. The IBR plan is an older program that can still provide monthly payments based on a borrower’s income, but for many, it will be significantly more expensive than the SAVE plan.
ICR Could Provide Student Loan Forgiveness Path For Borrowers With Small Balances
The anticipated return of the ICR plan later this month may not make much of a difference for many people. ICR is the oldest and most expensive IDR option, and in many cases, it will actually be even less affordable than IBR. But there are two groups of borrowers who could benefit from ICR.
The first are Parent PLUS borrowers. As a general rule, Parent PLUS loans are ineligible for IDR plans. But if they are consolidated into a Direct consolidation loan, that Direct consolidation loan can be repaid under ICR. However, Parent PLUS borrowers have had continuous access to the ICR plan, as the phase-out of the program did not impact them.
But a second group of borrowers who have relatively small balances compared to their income could possibly benefit from ICR. This is because the IBR and PAYE plans have a “partial financial hardship” requirement that prevents borrowers whose incomes are too high relative to their loan balances from enrolling in those plans. This could be problematic for borrowers who had been enrolled in SAVE and are nearing the end of their student loan forgiveness repayment period (either under IDR or PSLF). If SAVE goes away, and these borrowers can’t enroll in IBR because they don’t meet the partial financial hardship requirement, they may have no path to complete loan forgiveness.
ICR has no partial financial hardship requirement. So while borrowers may have fairly high payments under this plan, there is a small but meaningful subset of borrowers who may be able to enroll in the program to complete their remaining time required to receive student loan forgiveness under IDR or PSLF.
PAYE Plan Could Provide Similarly Affordable Payments And Faster Student Loan Forgiveness
The PAYE plan, unlike ICR, was designed to be quite affordable for borrowers. While PAYE might not be as generous as the SAVE plan, it can still provide reasonable monthly payment amounts. An undergraduate borrower with an annual income of $50,000 and a total federal student loan balance of $70,000 would have a SAVE payment of around $135 per month, and a PAYE payment of around $230 per month, as compared to a Standard plan payment of more than $700 per month. PAYE also has a 20-year student loan forgiveness term, which is less than the 25-year term for the ICR plan and an older version of IBR.
However, in addition to a partial financial hardship requirement, PAYE also has restrictions based on when a borrower took out federal student loans. To qualify, a borrower must have had no outstanding federal student loan balance as of October 1, 2007, and must have had a federal student loan disbursement on or after October 1, 2011.
Additional Developments Could Impact Student Loan Forgiveness Options
It’s important to note that while the Education Department has started the process to bring back the ICR and PAYE plans, that process is ongoing. Officials indicated in November that the plans could go live by mid-December, 30 days after the initial announcement.
However, there is also uncertainty about the future of student loan forgiveness under ICR and PAYE. These plans were created using the same regulatory process that established the SAVE plan, and the 8th Circuit has called into question whether student loan forgiveness is authorized at all for these programs. There is a possibility that the 8th Circuit could issue a ruling striking down loan forgiveness under ICR and PAYE at the end of the 20- or 25-year terms, although payments made under those plans should still count toward loan forgiveness under IBR and PSLF (which are not being challenged in court at this time).
But there are also questions about the intensions of the incoming Trump administration. It is certainly possible that the Trump administration could reverse course on reopening the ICR and PAYE plans, and it likely would have the authority to do so. Making wholesale changes to IBR and PSLF may be more difficult, however, as those programs were created directly by Congress.