Student loan forgiveness under the Key Payment Plan appears poised to be struck down by the courts

A federal appeals court appears inclined to reject President Joe Biden’s latest student debt relief initiative, which will reduce payments for millions and provide a path to student loan forgiveness. And a potentially sweeping ruling could also eliminate loan forgiveness under some much older repayment programs.

In August, the 8th Circuit Court of Appeals issued a nationwide injunction blocking Biden’s SAVE plan as the legal challenge from Republican-led states continues. SAVE is the newest income-driven repayment (IDR) plan. Like all IDR plans, the program uses a formula to tie a borrower’s monthly student loan payments to their income and family size, with the loan forgiven at the end of the plan’s repayment term if the borrower does not pay their entire balance . But SAVE is more generous than several older IDR plans, offering borrowers even lower payments and faster student loan forgiveness, as well as an interest rate break that puts an end to rising loan balances.

But during a critical hearing last week, a panel of 8th Circuit judges — all Republican appointees — questioned Biden’s lawyers and appeared inclined to reject the SAVE plan. An unfavorable court ruling can have much broader consequences Student loan forgiveness under other IDR plansalso.

Judges question student loan forgiveness and lower payments under the SAVE plan

The core of the Republican-led states’ arguments is that the Biden administration exceeded its legal authority by creating the SAVE plan and all its features and benefits.

Congress authorized the creation of IDR plans through legislation passed more than three decades ago, but provided few details about what the plans should look like (other than tying student loan payments to income, with a maximum repayment term of 25 years). Congress directed the Department of Education to develop regulations establishing the rules for these programs. The department did this four times over the past thirty years, creating what we now know as the Income-Contingent Repayment Plan, the Pay As You Earn Plan, the Revised Pay As You Earn Plan, and the SAVE Plan (which is the Revised Pay As You Earn plan replaced). As you deserve). These plans are often referred to by their acronyms – ICR, PAYE, REPAYE and SAVE – and all regulations provide for student loan forgiveness, usually after 20 or 25 years of repayment. Congress has passed separate legislation creating Income-Based Repayment Plans (IBR).

The states, led by Missouri, argue that Congress did not expressly authorize the SAVE plan’s many benefits. These include a generous income exemption limit that leaves lower-income borrowers unable to make any payments, a significant interest subsidy, and in certain cases the forgiveness of student loans sooner than 20 or 25 years.

But the states go even further and also suggest that Congress never intended this each student loan forgiveness at the end of an IDR repayment term (excluding IBR). The Biden administration counters that this argument flies in the face of legislative history related to the creation of IDR plans and three decades of regulations, policies and guidance spanning multiple Democratic and Republican administrations.

Last Thursday, the 8th Circuit’s panel of judges appeared to accept the states’ arguments during a key court hearing.

“If the borrower’s payments are reduced to zero and then forgiven, how is that a repayment plan?” U.S. Circuit Judge L. Steven Grasz asked Biden’s lawyers. during the hearing. Judge Grasz was appointed by former President Donald Trump. Another judge on the panel characterized the SAVE plan as “a massive effort to forgive loans.”

Only two judges on the three-judge panel would be needed to agree to abolish the SAVE plan.

Court challenge over SAVE Plan’s student loan forgiveness expected to reach the Supreme Court

The 8th Circuit’s current order blocking the SAVE plan is intended as a somewhat temporary measure while the legal challenge over the program continues. But after last Thursday’s court hearing, it seems highly unlikely that the ban will be revoked anytime soon. And the court could make a more definitive ruling on the program — and on student loan forgiveness generally under the other IDR plans derived from the same legal authority — within a few months.

The 8th Circuit likely won’t have the final say on the future of student loan forgiveness and reduced payments under the SAVE plan. Whatever the verdict, it is almost certain that this will be the case appealed to the U.S. Supreme Court. While the nation’s highest court could have a different interpretation of the program’s legality, challengers specifically relied on the Supreme Court’s 2023 decision striking down Biden’s first attempt at mass student loan forgiveness to argue that the SAVE plan should not be allowed to stand.

What borrowers should expect for student loan forgiveness and repayment in the coming months

Borrowers who were in the SAVE plan when the order was issued in August have been placed in a forbearance situation. During the forbearance period, borrowers may not be billed and their balances will not grow due to interest. However, the grace period does not count toward student loan forgiveness under either the IDR or Public Service Loan Forgiveness plans. At least eight million borrowers have been affected.

The ban has also sparked unrest throughout the federal student loan system. The Department of Education had to remove online IDR and direct consolidation filings to ensure it complied with the 8th Circuit’s order. And officials have instituted a system-wide processing pause on all IDR applications while they update the department’s internal systems. Recent graduates and borrowers who recently consolidated their federal student loans or took advantage of the Fresh Start program to get out of default have been unable to enroll in each The result is an IDR plan, which may put them at risk of default if they cannot afford the payments under the standard plan. Additionally, borrowers who have reached the 20- or 25-year threshold for student loan forgiveness under the ICR or PAYE plans have been unable to obtain a discharge.

The Ministry of Education announced this last week updated guidelines for the SAVE plan deferral arrangement indicating that IDR processing should resume soon, and some borrowers may be able to switch to the IBR plan (although they may have some disadvantages). Officials expect the postponement of the SAVE plan to last at least another six months.