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PALM BEACH, FLORIDA - APRIL 12: President Donald Trump and Speaker of the House Mike Johnson (R-LA) ... [+] hold a press conference at Mr. Trump's Mar-a-Lago estate on April 12, 2024, in Palm Beach, Florida. (Photo by Joe Raedle/Getty Images)
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A federal appeals court issued a significant ruling this week that dealt a major blow to several popular federal student loan repayment plans that, until now, led to eventual student loan forgiveness. Millions of borrowers could be impacted by the fallout from the decision.
The court ruling stems from a legal challenge brought by Republican-led states over President Joe Biden’s SAVE plan, one of several income-driven repayment (or IDR) options that allow borrowers to make payments based on their income and family size, with any remaining balance forgiven after 20 or 25 years. In its decision this week, the 8th Circuit Court of Appeals extended and expanded a preliminary injunction blocking the SAVE plan, and suggested that the program is likely to get struck down. But the court went even further and doubled down on a disputed conclusion that student loan forgiveness is not allowable under two other popular IDR plans.
While the lawsuit is not over, and this week’s ruling does not represent a final decision, the court has made its position quite clear. And the implications could be profound for borrowers pursuing student loan forgiveness under IDR plans. Here are the major takeaways.
Student Loan Forgiveness And Lower Payments Under The SAVE Plan Are Likely To Get Struck Down
The SAVE plan was intended to be the most affordable IDR option available to borrowers. The program, first launched in 2023, offered lower payments in most cases compared to other IDR plans including Income-Contingent Repayment, Income-Based Repayment, and Pay As You Earn (these plans are usually referred to by the acronyms ICR, IBR, and PAYE, respectively). In addition, SAVE has a generous interest subsidy designed to stop runaway balance growth associated with interest accrual, which has been a significant downside of IDR plans for some borrowers. And while IDR plans historically have allowed for student loan forgiveness after 20 or 25 years in repayment, SAVE can allow for even faster loan forgiveness for borrowers who took out relatively small balances.
But the 8th Circuit concluded that the generous features of the SAVE plan go too far and are beyond what Congress intended when it enacted a law authorizing the creation of income-driven plans more than three decades ago. The Biden administration and student loan borrower advocates had argued that Congress gave the Department of Education brought discretion to draft regulations governing these programs. But the 8th Circuit interpreted the scope of Congress’s intent quite narrowly, and strongly suggested that the SAVE plan is likely to get struck down. This could ultimately force millions of borrowers to switch to other repayment plans, significantly increasing their monthly payments.
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