The 8th Circuit Court of Appeals issued a significant ruling that blocks the SAVE Plan (Saving on a Valuable Education). The SAVE Repayment program was President Biden’s 2023 program offering lower income-driven repayment terms and potential loan forgiveness. The decision confirmed the probable fate of the program but did not provide alternatives to the 8 million borrowers who enrolled in the program.
Lawsuits from various states halted SAVE in late June 2024. It was the reaction plan the Department of Education (DOE) offered after the Supreme Court denied the One-time Loan Forgiveness program. Repayment restarted in October 2023, and SAVE became available.
SAVE Lawsuit May Have Opened Pandora’s Box
An unforeseen problem associated with the lawsuit is that the court is revisiting some other Income-Driven Repayment (IDR) Methods. The SAVE program used interpretations of the 1993 Higher Education Act which created three other IDR methods: Income-Contingent Repayment (ICR), Pay As You Earn (PAYE), and Revised Pay As You Earned (REPAYE). The court is now questioning these repayment methods.
The court is questioning the intent of these methods since they never formally received congressional approval. The SAVE program was significantly more generous than the previous IDR methods, which raised questions. Was this the intent of Congress to offer a more generous plan, or did the Department of Education make changes without the proper budget approval?
The Appellate Court is using the previous Supreme Court ruling as its guide. The SAVE program was projected to cost more than the One-time Forgiveness program.
Another issue in question is the IDR forgiveness plan associated with these programs. It is also called End-of-term forgiveness. Under these plans, forgiveness is available after 20 or 25 years, depending on the loan type. This loan forgiveness is usually taxable under current IRS rules and is now in question. These program rules were not in question before the SAVE program launch and lawsuit.
Borrowers who are enrolled in the Income-Based Repayment (IBR) methods are not affected. This court ruling does not affect Public Service Loan Forgiveness (PSLF) since Congress approved it under a different statute.
Current Status For Borrowers Using SAVE
Due to the SAVE halt, borrowers who are enrolled in SAVE were placed in Administrative Forbearance. This forbearance charges no interest on loans, payments are not required, and no PSLF credit months can be earned.
The DOE has reopened the ICR and PAYE methods to borrowers who want to start making payments and earn PSLF credits. Borrowers who had loans before 2011 do not have a 10% IDR repayment option since REPAYE was not re-instated. SAVE replaced REPAYE.
Another current problem is that the DOE told borrowers who want to enroll in another IDR method to submit a repayment change form. Many borrowers have submitted forms, but these forms were not processed, so now there is approximately a 3-month backlog.
President Biden put borrowers in administrative forbearance, which expires in early March. Due to the backlog and other uncertainties, no announcement has been made about whether the forbearance will be extended.
Higher Payment With Prior IDR Plan
As stated earlier, the SAVE repayment calculation was much more generous than any other IDR method. This borrowers’ benefit was its advantage and was why 8 million borrowers enrolled, but it was also its downfall.
Many borrowers will face significant monthly payment increases not just because of their change from SAVE but also due to income recertification. The IDR methods require annual income recertification, which has not been done since COVID-19 started. Starting in March 2025, income recertification will restart. IDR borrowers need to know what their IDR Anniversary date is. Their tax filing decision will be critical.
Graduate students who enrolled in SAVE for the interest-free loans will need to re-enroll in their in-school deferment. If they do not, repayment will restart once the final ruling restarts.
New IDR Repayment Option Proposal
With the new administration, a proposal for a single IDR method is on the table. It would go into effect for loans issued after July 2025. It may charge a higher payment amount but offer different forgiveness rules. Previous IDR methods would be grandfathered in for older loans.
SAVE Update Conclusion Leaves More Uncertainty
The good news is we have a more straightforward path to the outcome of SAVE, yet we still don’t know our options. The Appellate Court has pushed it back to the lower courts for clarity. It is unlikely that the current administration will appeal this decision.
The next step is to wait for Congress or the DOE to decide on what options borrowers will have. I want a decision and stability in the rules so borrowers can plan this aspect of their lives.
If you need help navigating your current options or once these rules are finalized, please contact PayForEd or one of our trained advisors. Remember, the 2024 tax filing decisions are critical to your upcoming loan repayment strategy.
