On October 24, the 8th U.S. Circuit Court of Appeals heard an argument related to the current SAVE Repayment halt. This halt started in late June as various Republican State Attorney General sued the Department of Education (DOE) on the constitutionality of these changes. Since this lawsuit, it has put not just the SAVE on freeze but other student loan repayment and consolidation on hold also.
This puts borrowers, advisors, and loan servicers in a continued state of uncertainty. The initial reaction to the hearing was not favorable to SAVE becoming law. The proceeding raised some other concerns regarding loan forgiveness, specifically what we call end-of-term forgiveness. This is the loan forgiveness earned after 20 or 25 years when using an Income-Driven Repayment (IDR) method.
Quick Background on the Legal Arguments
The DOE introduced the SAVE repayment method just after the Supreme Court denied the President’s one-time loan forgiveness. The Supreme Court justified its decision by stating that Congress needed to approve an expenditure at that dollar amount, which it did not have.
Under a different regulation, the SAVE Act was created. The DOE used a process that gives different branches of the federal government the authority to modify current laws to close loopholes or make the law clearer. These modifications must have a minimal or a favorable impact on the federal budget. If it does not, it typically will need Congressional approval since they control the purse strings. SAVE is estimated to cost between 400 – 600 billion dollars, which may be understated.
SAVE Repayment Status
The SAVE is still on hold, and the President just extended the pause for another six months. Under this Administrative Forbearance, borrowers enrolled in SAVE will not need to make payments, and no interest will be charged to the loans. The downside is that if the borrower is pursuing Public Service Loan Forgiveness (PSLF), they will not be earning PSLF credit months.
As I mentioned earlier, the SAVE halt has resulted in added complexity. The DOE IDR system needs to be modified to limit a borrower’s options. They have stated that this should be done by the end of the Fall season. We were unable to access the online IDR function at the time of this article.
Changing Repayment Plan
Borrowers could consider changing plans, which could increase their monthly payments. The SAVE program had the most favorable calculation. You could also have the unpaid interest capitalized, increasing your loan balance.
Depending on your loan dates, you may be limited to specific IDR methods. Those trying to earn PSLF credits should consider changing to see if this makes sense and if they can afford the payment amount.
New End-of-Term Loan Forgiveness Risk
This lawsuit has raised a new issue: the legal standing of loan forgiveness after 20 or 25 years. This would impact PAYE, REPAYE, SAVE, and ICR. According to the law, it does not formally state that these methods offer loan forgiveness. We call this the end-of-term forgiveness. This new risk has been raised as they dissect the rhetoric of the original law.
Under normal and current IRS rules, this loan forgiveness is typically taxable, unlike PSLF, which is not. However, due to the CARES Act, all loan forgiveness is tax-free through 12/31/2025. This tax bill is often called the tax bomb of loan forgiveness.
New Loan Forgiveness Proposals
The President and the DOE have put forward two other loan forgiveness plans. One was halted in September, and the new program will be commented on in the coming months. Both programs address specific groups of borrowers with different types of financial hardship.
Other Loan Processes Impacted by the SAVE Halt
As with any complex system, things are integrated with other parts. The SAVE halt has impacted the electronic consolidation and the ability to enroll in any of the other IDR methods. The DOE has announced that these functions should be available by the end of fall.
If you call the loan servicer, they may recommend submitting the paper version of the form. In some cases, this paper submission may still not get processed as hoped. For example, if you submit a paper direct consolidation and select an IDR repayment method, it is likely they will not process that consolidation until the IDR system is fixed.
SAVE Repayment and Loan Forgiveness Program Legal Status Conclusion
This has been a confusing and frustrating time for both borrowers and advisors. With the end of the on-ramp program, IDR income recertification, and the grace period for 2024 graduates ending, making the right decision could be difficult. Starting 1/1/2025, the federal repayment rules return to standard regulations, and most COVID extensions expire. Borrowers will need to have flexibility and plan on making adjustments once the lawsuits are finalized. Staying current on your student loan repayment should be a priority now.
Based on the Supreme Court’s previous decision, I would lean toward SAVE and other new student loan repayment changes needing congressional approval for survival. If you need help with your analysis, PayForEd and our listed certified advisor are available to help.
