Student loan forgiveness under the Master Payment Plan appears likely to be overturned by the court

A federal appeals court appears inclined to reject President Joe Biden’s newest student debt relief initiative, which cuts millions in payments and clears the way for student loan forgiveness. And the potentially far-reaching ruling could also end loan forgiveness for several much older repayment programs.

In August, the 8th Circuit Court of Appeals issued a nationwide injunction blocking Biden’s SAVE plan while legal challenges filed by Republican-led states continue. SAVE is the newest income-driven debt repayment plan, or IDR. Like all IDR plans, the program uses a formula to tie a student loan borrower’s monthly payments to their income and family size, with loan forgiveness at the end of the plan’s repayment term if the borrower does not pay off their full balance. But SAVE is more generous than several older IDR plans, offering borrowers even lower payments and faster student loan forgiveness, as well as interest benefits that put an end to ballooning loan balances.

But in a key court hearing last week, a panel of 8th Circuit judges, all of whom were appointed by Republicans, grilled Biden administration lawyers and appeared inclined to strike down the SAVE plan. An unfavorable court decision could have much broader implications for student loan forgiveness under other IDR plans.

Judges Question Student Loan Forgiveness and SAVE Plan Benefit Reductions

The core of the argument being made by Republican-led states is that the Biden administration has exceeded its statutory authority by creating the SAVE plan and all its features and benefits.

Congress authorized the creation of IDR plans through a law passed more than three decades ago, but provided few details about what the plans would 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 guidelines for these programs. The Department has done this four times in the last 30 years, creating what we now know as the Income-Driven Repayment Plan, the Pay As You Earn Plan, the Revised Pay As You Earn Plan, and the SAVE Plan (which replaced the Revised Pay As You Earn Plan). Pay as you earn.” How do you earn). These plans are often referred to by acronyms—ICR, PAYE, REPAYE, and SAVE—and all regulations provide for student loan forgiveness, usually after 20 or 25 years of repayment. Congress passed a separate law creating income-based repayment plans, or IBRs.

States, led by Missouri, argue that Congress has not expressly authorized many of the benefits of the SAVE plan. These include a generous income forbearance limit that allows low-income borrowers to pay nothing, significant interest subsidies and student loan forgiveness in some cases sooner than 20 or 25 years.

But the states go further and also suggest that Congress never intended this to happen. any student loan forgiveness at the end of the IDR repayment term (except IBR). The Biden administration counters that this argument is inconsistent with the legislative history surrounding the creation of IDR plans, as well as 30 years of rules, policies and guidance that span multiple Democratic and Republican administrations.

Last Thursday, in a key court hearing, a panel of 8th Circuit judges appeared to side with the states’ arguments.

“If a borrower’s payments are reduced to zero and then forgiven, what is that repayment plan?” U.S. District Judge L. Steven Gras asked Biden administration lawyers during the hearing. Judge Gras was appointed by former President Donald Trump. Another judge in the case, the Commission described the SAVE plan as a “massive effort to forgive loans.”

It only takes two judges on a three-judge panel to agree to overturn the SAVE plan.

Lawsuit over SAVE Plan student loan forgiveness expected to reach Supreme Court

The current 8th Circuit injunction blocking the SAVE plan is intended as a temporary measure while litigation over the program continues. But after last Thursday’s court hearing, it seems unlikely the injunction will be lifted any time soon. And the court could issue a clearer ruling on the program—and on student loan forgiveness in general under other IDR plans stemming from the same legal authority—within a couple of months.

The 8th Circuit will likely have no final decision on future student loan forgiveness and payment reductions under the SAVE plan. Whatever the decision, it will almost certainly be appealed to the US Supreme Court. While the nation’s highest court may have interpreted the program’s legality differently, challengers in particular relied on a 2023 Supreme Court decision overturning Biden’s first attempt to push for mass student loan forgiveness to argue that the SAVE plan should not remain in place.

What Borrowers Should Expect About Student Loan Forgiveness and Repayment in the Coming Months

Borrowers who were enrolled in the SAVE plan at the time the injunction was issued in August were granted a forbearance. During the deferment, borrowers should not be billed and their balances will not increase due to interest. However, the deferment period will not count toward student loan forgiveness under either the IDR plans or the Public Service Loan Forgiveness program. At least eight million borrowers were affected.

The injunction also threw the entire federal student loan system into turmoil. The Department of Education had to cancel online applications for IDR and direct consolidation to ensure compliance with the 8th Circuit’s order. And officials announced a system-wide pause in the processing of 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 avoid default were unable to enroll in any As a result, the IDR plan potentially exposes them to the 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 were unable to obtain loan forgiveness.

Last week, the Department of Education released updated guidance on opting out of the SAVE plan, indicating that IDR processing should resume soon and some borrowers may be able to switch to the IBR plan (although this may have some downsides). Officials expect the reprieve from the SAVE plan to last at least another six months.