Appealing court may soon decide on Biden's student loan repayment strategy. Here's crucial information for debtors.
The initiative, referred to as SAVE (Reducing Costs on Vital Educational Investments), aims to reduce monthly installments and expedite the process of obtaining student loan forgiveness. This plan was introduced last year but has been on hold since July due to legal proceedings.
President Biden introduced SAVE after the Supreme Court dismantled his flagship, one-time student loan forgiveness plan. If successful, this repayment strategy could mark the most substantial alteration that President Biden has implemented in the federal student loan system throughout his term. At present, approximately 8 million individuals are enrolled in this program.
The legal action was initiated in April by attorneys general from Missouri, Arkansas, Florida, Georgia, North Dakota, Ohio, and Oklahoma.
The states contend that the Biden administration lacks the legislative authority to instate the SAVE plan. However, the government argues that its authorization stems from the Higher Education Act, which was passed by Congress years ago.
During a court hearing this week, Missouri's solicitor general, Joshua Divine, claimed that the government's argument was a "mockery" of the entire statute.
The case was heard by a panel of three judges, all of whom were appointed by Republican presidents. The judges have not set a date for their verdict.
Earlier this week, the Department of Education provided updates on the SAVE plan's status. Here's what borrowers should know:
SAVE payments might be deferred for at least 6 months
Borrowers enrolled in SAVE have been placed in an income-free suspension during which they are released from making monthly student loan payments.
This week, the Department of Education announced that borrowers enrolled in SAVE should anticipate remaining in the income-free suspension for at least six more months, depending on legal developments. The department is working collaboratively with its student loan servicers to synchronize their systems with the court's injunction, a process that could take several months.
Just like other available student loan repayment plans, SAVE links a borrower's monthly payments to their income and family size and offers loan forgiveness at the conclusion of the payment term.
However, SAVE is the most generous plan for low-income borrowers and can reduce monthly payments by half for individuals who have loans from undergraduate school. Certain borrowers with minimal student debt could see loan forgiveness in just 10 years under this plan.
The forbearance pause does not contribute to loan forgiveness
Although the payment pause is beneficial for many borrowers, it could potentially delay student loan forgiveness for some.
The time spent in forbearance will not be counted toward the required number of payments needed to be eligible for debt relief under programs like Public Service Loan Forgiveness.
Under this plan, eligible public-sector employees can have their remaining student loan debt extinguished after making 120 qualifying monthly payments.
Some borrowers may be eligible to "make amends" for missed PSLF credit for time spent in forbearance as a result of the litigation. More information about this process can be found on the Federal Student Aid website.
Older repayment plans will be reopened later this fall
Some borrowers, such as those pursuing PSLF, may want to switch out of SAVE and into a different repayment plan so that they can continue accumulating credit toward loan forgiveness.
Currently, the only other qualifying income-driven plan available for most borrowers is Income-Based Repayment, or IBR. However, the Department of Education announced earlier this week that it will take regulatory action this fall to reopen two other plans that closed to new enrollment in July because the SAVE plan offered the same or better benefits.
The department intends to reopen the Pay As You Earn, or PAYE, repayment plan and the Income-Contingent Repayment, or ICR, plan.
Switching plans may have drawbacks. Borrowers may face higher monthly payments under other income-driven repayment plans than those they were paying under the SAVE plan. Additionally, unpaid interest can accumulate when a borrower voluntarily switches in and out of certain repayment plans.
Certain types of student loan forgiveness have been postponed
Income-driven repayment plans guarantee student loan forgiveness after a borrower makes either 20 or 25 years of qualifying payments. However, the Department of Education is not canceling student loan debt under the SAVE, PAYE, or ICR repayment plans due to the court injunction at present.
Borrowers who reach the qualifying number of payments necessary for debt relief during this time will be placed in an income-free suspension.
Borrowers enrolled in the IBR plan, which was introduced under a separate law, are not affected and can still be granted loan forgiveness if they reach the necessary payment threshold.
Biden's other student loan proposals are also facing lawsuits
Following the Supreme Court's dismantling of President Biden's one-time student loan forgiveness program last year, he vowed to explore alternative avenues to broadly eliminate student loan debt.
A fresh series of proposals unveiled in April would, among other things, absolve accumulated interest for borrowers whose balances exceed what they originally borrowed. Although these proposals are yet to be finalized, they are already undergoing a legal challenge from a group of Republican-led states.
However, the Biden administration continues to forgive student loan debt via existing programs and has approved the cancellation of more than $175 billion for close to 5 million individuals.
The legal action against SAVE, initiated by attorneys general from several states, argues that the Biden administration lacks the legislative authority to instate the plan. The government counters that its authorization stems from the Higher Education Act.
The SAVE plan, currently on hold due to legal proceedings, offers a six-month deferment of payments for borrowers, releasing them from making monthly student loan payments.
