Important new SAVE plan guidance confirms student loan forgiveness is also locked in for other IDR plans

The Department of Education has released new and updated guidance on student loan repayment and forgiveness for borrowers affected by the ongoing SAVE plan litigation.

The SAVE plan debuted last fall as a new income-based repayment plan. Touted by Biden administration officials as the most affordable IDR plan ever created, the program includes reduced payments, a generous interest benefit that wipes out accumulated excess interest, and several different paths to eventual loan forgiveness after 10 to 25 years of repayment. More than eight million borrowers signed up for SAVE or were automatically switched from the previous REPAYE plan.

But nine months after the program was launched, a coalition of Republican-led states filed a lawsuit, alleging that the Biden administration overstepped the authority of Congress to establish this new initiative. Administration officials responded that the Department of Education has had the legal authority to create the parameters for IDR plans since Congress first passed enabling legislation more than 30 years ago.

In August, the 8^th The Circuit Court of Appeals issued an injunction blocking the SAVE plan and preventing the Department of Education from implementing most of its functions, including lower payments, interest relief and any loan forgiveness . The litigation has also called into question the future of loan forgiveness under several other IDR plans. Meanwhile, millions of borrowers have been forced into forbearance. Although there are no payments or interest during forgiveness, the period will not count toward student loan forgiveness in either IDR or public service loan forgiveness.

This week, the Department of Education released updated guidance for the SAVE plan injunction and associated forbearance, with major implications for student loan forgiveness under IDR plans in general.

Student loan forgiveness is blocked not only by the SAVE plan, but also for ICR and PAYE

The Department of Education confirmed in its new guidance what many borrower advocates and legal experts had suspected: the 8^th The circuit’s general requirement doesn’t just affect student loan forgiveness under the SAVE plan. It has also blocked loan forgiveness in several others IDR plans derived from the same legal authority.

Although only Plan SAVE was the target of the Republican-led coalition of states, the legal authority upon which the Department of Education relied to create SAVE was established by Congress through a provision of the Higher Education Act in 1993. Congress broadly authorized the creation. of IDR plans (then called Income Continent Repayment Plans), with the only requirement that payments are linked to the borrower’s income and that the repayment term is no longer than 25 years. It was widely understood that at the end of this 25-year term, borrowers would receive loan forgiveness for any remaining balance.

Subsequently, in accordance with the Higher Education Act, the Department of Education drafted detailed regulations in 1994 to establish the first official IDR scheme, which was called the ICR. And this regulation expressly authorizes the forgiveness of the loan at the end of the 25-year term of the plan. The department subsequently used this same rulemaking process to create the PAYE scheme in 2012, the REPAYE scheme in 2015 and finally the SAVE scheme in 2023.

In addition to these ICR-derived plans, Congress passed separate legislation in 2007 and 2010 creating another set of IDR plans: income-based repayment, or IBR, plans. IBR plans are very similar to ICR, PAYE, REPAYE and SAVE at a basic level in that they use a formula applied to the borrower’s income and family size, with a cap on the length of the repayment term. But in the legislation creating the IBR plans, Congress specifically authorized loan forgiveness at the end of 20- or 25-year terms.

Republican-led opponents have seized on this distinction to argue that Congress intended student loan forgiveness to occur at the end of IBR terms, but not at the end of ICR-derived IDR plans (despite legislative history and context to the contrary), and that the 30-year-old regulations derived from that statutory authority establishing IDR loan forgiveness are effectively illegal.

The 8^th The Circuit’s injunction issued in August appeared to block student loan forgiveness not only under the SAVE plan, but also under all IDR plans that were established under the same statutory authority in 1993. This week, Education has confirmed that this is the case. According to the new guidance, the department can’t authorize the forgiveness of student loans under the ICR, PAYE, REPAYE or SAVE plans while the 8^th The circuit court order remains in effect. Borrowers can continue to make ICR and PAYE payments (while SAVE borrowers remain in forbearance).

Student loan forgiveness under the IBR is intact, but other borrowers will enter forbearance at the end of the repayment term

The Department of Education stated that because of the separate statutory authorization of the IBR, student loan forgiveness under the IBR is not blocked under 8^th Mandate of the circuit. Indeed, in its written order, the court specifically noted IBR’s student loan forgiveness after 20 or 25 years, as clearly authorized by Congress, in contrast to what it determined was “ambiguity” for ICR-derived IDR plans created through Department of Education regulations. such as ICR, PAYE, REPAYE and SAVE.

Under the IBR, borrowers who reach the 20- or 25-year threshold for student loan forgiveness will receive a discharge, the department says. But borrowers who reach the loan forgiveness milestone under the ICR, PAYE and SAVE scheme will be placed into an interest-free forbearance while litigation continues.

The court order could affect student loan forgiveness based on the IDR account adjustment

Worryingly, the Department of Education’s findings suggest that borrowers hoping to receive student loan forgiveness under the IDR account adjustment may encounter complications. Account Adjustment is a unique initiative designed to provide borrowers with a retroactive IDR credit to rectify longstanding historical issues with these plans, including misinformation and poor recordkeeping. Under the adjustment, which is expected to be completed soon, many borrowers can move toward eventual IDR student loan forgiveness, with some borrowers reaching the threshold for immediate discharge.

But if the Education Department has blocked for now the implementation of student loan forgiveness under ICR, PAYE and SAVE, borrowers who are enrolled in these plans will not receive an immediate discharge, the guidance says, even under the IDR account adjustment. Instead, they will be placed on an interest-free forbearance while the litigation continues.

To obtain IDR student loan forgiveness, these borrowers may need to switch to the IBR plan. Importantly, payments made under other IDR plans (including ICR, PAYE, REPAYE, and SAVE) may count toward the 20- or 25-year student loan forgiveness term for IBR. So even if a borrower were to get, say, 24 years and 11 months of loan forgiveness credit under the ICR plan, switching to IBR in that last month should allow the borrower to qualify for the discharge of your balance. The latest guidance from the Department of Education indicates that IDR processing is starting to resume, so borrowers can request plan changes (but expect long delays).

However, IBR has its own problems. IBR payments can be much more expensive than other IDR options like the SAVE plan. Some borrowers may not qualify for the IBR plan, such as Parent PLUS borrowers or those who do not have “partial financial hardship” as defined by program rules. And the IBR has none of the interest benefits that the SAVE plan has, meaning borrowers’ balances can increase under the IBR due to interest accrual, and that interest can potentially be capitalized in certain circumstances