Student loan borrowers enrolled in a new federal repayment plan could see their monthly payments cut in half in the future, thanks to a last-minute reprieve by a federal appeals court.
But now, legal wrangling is spreading confusion throughout the student aid system, with millions of borrowers’ monthly payments in doubt. And the relief granted by the courts is only temporary, so the Savings on a Valuable Education, or SAVE, plan may not offer long-term reduced payments.
“It’s almost impossible to know what to do at this point,” said Persis Yu, deputy executive director of the Student Borrower Protection Center. “Where we are is just unfair to student loan borrowers.”
The Department of Education continues to work on separate legislation that would provide debt relief to approximately 30 million student borrowers. But that effort will almost certainly end up in court as well.
Here’s the latest on federal student loan borrowers.
What happened to student loans?
First, the only program affected by the legal turmoil is the SAVE plan, which is available only for federal student loans. Personal loans and other loan repayment programs continue to operate as usual.
The SAVE plan is designed to lower monthly payments and, for borrowers who take out small loans, pay off their debt faster. Both efforts have been challenged in court by Republican officials from several states.
SAVE allows borrowers to make monthly payments based on their income, not on the amount borrowed. In exchange, most borrowers must continue to make payments for longer than in the standard plan, where the loan is paid off over 10 years. Under SAVE, borrowers typically pay over 20 years for undergraduate loans and 25 years for graduate school loans. Then, the unpaid balance will be forgiven.
On July 1, the monthly payment on student loans for those enrolled in the SAVE plan is scheduled to be cut in half, dropping from 10% of discretionary income to 5%. But at the beginning of June, the Department of Education informed borrowers that the next payment must be made in the first half of July that it will be included for a month when the monthly bill is recalculated. The next payment is due in August and, for undergraduate loans, is based on 5% of discretionary income.
Last week a federal judge in Kansas issued a temporary injunction, prohibiting the Department of Education from reducing the repayment rate to 5%. The department responded by telling the 3 million additional SAVE participants that they too would be put on hold until August when their monthly payments are recalculated. Unlike other forbearance borrowers, these borrowers will have a month to pay back, according to Natalia Abrams, president and founder of the Student Debt Crisis Center.
Then on Sunday, a divided three-judge panel of the 10th Circuit Court of Appeals stayed the order pending the department’s appeal. It’s impossible to predict how long the relief will last because even if the department wins on appeal, the case could go to the U.S. Supreme Court to have it overturned.
What should borrowers do under the SAVE plan?
SAVE plan borrowers who have received notification that they are in temporary forbearance will remain in forbearance until August. Some SAVE plan participants, however, have received bills from loan servicers for July that show a 5% repayment rate. The borrowers will have to make the payments this month, the department said.
SAVE plan borrowers least affected by legal repayments are approximately 4.5 million low-income, $0 monthly payment borrowers.
Borrowers who are not sure where they should go first go to studentaid.gov to see if they are enrolled in the SAVE plan. If so, the next step is to ask the loan provider — whose contact information should also be available on studentaid.gov — when the next payment is due and how much you owe.
This can be difficult to do, as many other borrowers are also trying to contact their service. “From what I’ve heard, it’s hard to do,” Yu said. “If they can find that information online, that might be a viable solution.”
Otherwise, he said, SAVE participants should wait for more information from the Department of Education and loan providers, because they are not satisfied.
Can borrow in other plans to SAVE?
yes already. The department temporarily shut down its online application portal after the injunction was issued, but loan servicers continue to accept downloadable application forms available at studentaid.gov. Abrams said the department will reopen the online application portal soon.
In addition to payments based on 5% of discretionary income, the plan gives borrowers more breathing room by increasing the amount of income considered nondiscretionary by 50%. And if the reduced monthly payment isn’t large enough to cover the interest you’ll receive on the loan, the SAVE plan eliminates the larger interest expense rather than adding it to the borrower’s debt.
What about debt reduction?
A federal judge in Missouri issued a temporary injunction last week against a provision of the SAVE plan that will forgive unpaid balances after 10 years of repayment for those who borrowed no more than $12,000 in student loans. (Debt forgiveness will be delayed by one year of payments for each additional $1,000 borrowed.)
The injunction was not upheld by the appellate court.
Separately, the Biden administration finalized a proposed rule that would cancel loans for borrowers who have been paying off undergraduate loans for at least 20 years, or graduate school loans for at least 25 years. Importantly, the rule would also reduce or eliminate unpaid interest charges incurred by about 25 million borrowers, including all unpaid interest by borrowers on income-driven repayment plans.
Although many people who commented on the rule were supportive, Yu said, not all were. Opponents of Biden’s student loan relief measures say it’s unfair to shift college costs to taxpayers, many of whom are making sacrifices to pay off student loans.
However, Yu said, even those who have paid off their loans “are strongly encouraged to cancel their loans” because they know how burdensome college costs are and the struggles borrowers face. “Young people today can’t start a family, buy a house, start a business, and that’s not what we want for the next generation,” he said.
When the administration laid out its plan to reduce student debt in April, it also said it would cancel some or all of the loans of borrowers who are having financial difficulty repaying their federal loans. The administration has yet to propose rules to implement the changes, but more than 220 groups representing borrowers, workers, veterans, the disabled and consumers sent a letter to the Department of Education on Monday urging it to move forward quickly.
“Tens of millions of borrowers were robbed of relief when the Supreme Court’s conservative majority attacked President Biden’s original debt relief program,” the letter said. The hardship rule “represents hope for millions of borrowers and their families who have been forced to wait nearly two years for much-needed relief,” he added.
Abrams said thousands of people have also written the White House to urge action now on the hardship proposal. If the rulemaking process begins later this year, he said, the implementation of the final rules will be delayed until next year – when Biden is no longer president.