Student loan borrowers blocked from affordable repayment plans

Boston Globe

01-03-2025

The SAVE plan has been in legal limbo ever since, and participants' payments have been on hold since last summer. But last week, applications to the three other income-driven plans were also taken down -- older programs that hadn't been subject to any litigation. That effectively shut the door to more affordable plans for borrowers in financial distress, and eliminated a crucial component needed to participate in the Public Service Loan Forgiveness program -- at least temporarily.
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"The department is reviewing repayment applications to conform with the 8th Circuit's ruling," a spokesperson for the Education Department said Thursday, adding that it updated information for borrowers on StudentAid.gov, including on a page about court actions related to SAVE.
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Here's what we know now:
What just happened?
The 8th Circuit upheld a temporary ban on a portion of the SAVE plan issued by the U.S. District Court for the Eastern District of Missouri. The appeals court sent the case back to the district court with instructions to expand the preliminary injunction to the entire SAVE rule (although other legal rulings had already temporarily suspended the program).
But the appellate court didn't stop there: The judges also said the Education Department secretary lacks the explicit authority to grant loan forgiveness in any Income-Contingent Repayment plans, even though it has been done for more than three decades. (Borrowers make monthly payments equal to a percentage of their discretionary income, which varies across income-driven plans. But after a set number of years, usually 20 to 25, any remaining balance is canceled.)
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"This is a radical departure from how this statute has been interpreted and administered for nearly 30 years," said Michele Zampini, senior director of college affordability at the Institute for College Access and Success, a research and advocacy group.
The Education Department posted a banner on its website that said the injunction prevents it from administering SAVE and parts of other income-driven plans -- and, as a result, applications for those plans and online loan consolidations were unavailable.
It is important to remember that the decision is not final and that litigation is continuing, said Abby Shafroth, director of the National Consumer Law Center's Student Loan Borrower Assistance Project. "But the decision is very worrying for borrowers who depend on the SAVE plan to manage their payments and work toward being debt free," she said.
What's likely to happen next?
Scott Buchanan, executive director of the Student Loan Servicing Alliance, an industry group, said he would expect that applications for at least one of the income-driven plans, known as income-based repayment, will become available again "as soon as practical."
The reasons are complicated: That's because the income-based repayment plan was created as part of a July 2009 law, which explicitly permits loan cancellation at the end of the repayment term, whereas SAVE was a regulation established by the department using authority established under a 1993 law. The states that initially brought the lawsuit argued that loan cancellation wasn't explicitly permitted under the 1993 law, and the appellate court sided with that interpretation.
But the department has relied on that authority to create three other income-driven programs, all before SAVE, each of which incrementally improved on the plans before it. They were Income-Contingent Repayment, introduced in 1994; Pay As You Earn (PAYE), introduced in 2012; and Revised Pay As You Earn (REPAYE), which became available in 2015 and was replaced by SAVE.
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Are income-driven loan applications being processed now?
No, all applications have been temporarily halted, according to Buchanan. He said the servicers have received instructions to stop processing the income-driven and loan-consolidation applications for three months, but he expected they will receive additional guidance in the coming weeks.
Monthly payments are still being collected on the other existing income-driven plans (Income-Based Repayment, Pay As You Earn and Income-Contingent Repayment) while SAVE borrowers remain in an interest-free forbearance while the litigation continues.
Is the Public Service Loan Forgiveness program still available?
Yes, it is still open to government and nonprofit employees such as public schoolteachers, librarians and public defenders. After 120 qualifying payments are made, any remaining balance is wiped out.
But there is one major obstruction: Most borrowers need to be enrolled in an income-driven repayment plan to be eligible for loan cancellation, and it's not possible to apply to any of those plans right now.
If you're already in a qualifying repayment plan, however, and you become newly eligible for the public service program (because of a new job, for example), you can still enroll. But if you're in the SAVE plan, where payments have been halted because of the ongoing litigation, your qualifying payments have also been put on hold -- and you can't make any progress toward forgiveness.
The public service program, which President George W. Bush signed into law in 2007, is not at risk right now, and student-loan experts say there isn't a broad appetite dismantle the popular program, which would require Congress to pass a bill.
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What if I'm close to making all of my payments in the public service program, but I am stuck in the SAVE plan?
More than 2 million people are enrolled in the public service program and hundreds of thousands of them are approaching the finish line: About 21,700 borrowers have made enough payments to qualify for cancellation, while 330,100 had made 97 to 119 qualifying payments as of Dec. 31, according to data from the Education Department's Federal Student Aid office.
Borrowers who are enrolled in the SAVE plan and have nearly enough qualifying payments have few good options.
"Borrowers stuck in SAVE can either wait for the IDR applications to open back up and switch to another IDR plan," said Betsy Mayotte, president of the Institute of Student Loan Advisors, a group that provides free guidance to borrowers. "Or ride out the SAVE forbearance and plan on using what's called 'buyback' to get credit for those months once they have certified 120 months of eligible employment."
What are my options if I can't afford payments (because I lost my job or some other reason)?
There are other options besides income-driven repayment plans that can generally be requested through your loan servicer or the company that manages your payments. Borrowers can temporarily pause payments through deferments or forbearance, but those programs have different eligibility requirements and consequences, largely because of the way interest is treated.
"Borrowers can receive deferments for things such as economic hardship or being unemployed," said Mayotte. "Forbearances are generally applied in cases of less specific financial hardship."
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There are other repayment plans that can lower your monthly obligation: graduated repayment, where payments start lower and rise over time, and extended repayment, which lowers the monthly payment by lengthening the loan term.
Simply consolidating your loans can also lower your monthly payments by extending the repayment period, but there are drawbacks. You may have a higher interest rate on all of your debt, and you'll end up paying more overall.
Will I be penalized if I cannot recertify my loans?
Each year, borrowers enrolled in income-driven repayment plans must recertify their income or face negative consequences, including being kicked out of the repayment plan. But those applications are also not available right now.
For now, it's not something you need to worry about, Buchanan said. The loan servicers have been instructed to push back those deadlines on a month-by-month basis, and they will be in touch with borrowers when they receive more clarity from the Education Department.
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