It appears that student loan forgiveness under a key repayment plan may be invalidated by the court

A federal appeals court appears inclined to reject President Joe Biden’s latest student debt relief initiative, which reduces payments for millions and provides a path to student loan forgiveness. A potentially far-reaching ruling could also eliminate loan forgiveness under several much older repayment programs.

In August, the 8th Circuit Court of Appeals issued a nationwide order for payment blocking Biden’s SAVE plan while a legal challenge brought by Republican-led states remains pending. SAVE is the newest income-driven repayment (IDR) plan. Like all IDR plans, the program uses a formula that ties a borrower’s monthly student loan payments to his or her income and family size, with loan forgiveness at the end of the plan’s repayment period if the borrower does not repay the entire balance. But SAVE is more generous than several older IDR plans, offering borrowers even lower payments and faster student loan forgiveness, as well as an interest benefit that puts an end to growing loan balances.

But last week, during a critical court hearing, a panel of 8th Circuit judges — all Republican appointees — attacked Biden administration lawyers and appeared inclined to reject the SAVE plan. An unfavorable court decision may have much wider consequences for… student loan forgiveness under other IDR plansalso.

Judges question student loan forgiveness and lower payments under the SAVE plan

The crux of the Republican-led states’ argument is that the Biden administration overstepped its statutory authority by creating the SAVE plan with all of its features and benefits.

Congress authorized the creation of IDR plans under legislation passed more than three decades ago, but provided few details on what the plans should look like (other than tying student loan payments to income, with a maximum repayment period of 25 years). Congress directed the Department of Education to prepare draft regulations establishing the principles for conducting these programs. The Department has done this four times in the last 30 years, creating what we now know as the Income-Driven Repayment Plan, the Pay As You Earn Plan, the Revised Pay What You Earn Plan, and the SAVE Plan (which replaced the revised wage). How do you earn? These plans are often referred to by acronyms – ICR, PAYE, REPAYE and SAVE – and all applicable laws provide for student loan forgiveness, usually after 20 or 25 years of repayment. Congress passed separate legislation creating income-driven repayment (IBR) plans.

The states, led by Missouri, argue that Congress has not expressly authorized many of the benefits of the SAVE plan. These include a generous income-forgiveness cap, allowing lower-income borrowers to pay nothing, a significant interest subsidy, and in some cases, student loan forgiveness earlier than 20 or 25 years.

But the states go even further and suggest that Congress never intended to do so everyone student loan forgiveness at the end of the IDR repayment period (except IBR). The Biden administration counters that this argument is inconsistent with the legislative history of establishing IDR plans and 30 years of regulations, policies and guidance that have spanned multiple Democratic and Republican administrations.

Last Thursday, during a key court hearing, a panel of 8th Circuit judges apparently agreed with the states’ argument.

“If a borrower’s payments are reduced to zero and then forgiven, what will be the repayment plan?” U.S. District Judge L. Steven Grasz asked Biden administration lawyers during the trial. Judge Grasz was appointed by former President Donald Trump. Another judge on the panel characterized the SAVE plan as a “massive attempt at loan forgiveness.”

It would only take two judges on a three-judge panel to agree to reject the SAVE plan.

A lawsuit over student loan forgiveness under the SAVE plan is expected to go to the Supreme Court

The 8th Circuit Court’s current order blocking the SAVE plan is intended to be a temporary measure while the legal challenge to the program continues. However, following a court hearing last Thursday, it seems highly unlikely that the order will be lifted any time soon. The court could issue a more definitive ruling on the program — and on student loan forgiveness generally under other IDR plans issued by the same authority — within a few months.

The 8th Circuit likely won’t have the final say on the future of student loan forgiveness and reduced payments under the SAVE plan. Regardless of the verdict, it is almost certain that this will happen appealed to the United States Supreme Court. While the nation’s highest court may have had a different interpretation of the program’s legality, challengers in particular cited the Supreme Court’s 2023 decision that rejected Biden’s first attempt at mass student loan forgiveness, arguing that the SAVE plan should not stand.

What borrowers should expect from student loan forgiveness and repayment in the coming months

Borrowers who participated in the SAVE plan when the order was issued in August were granted forbearance. During the forbearance period, borrowers should not be charged any fees and their balance will not grow due to interest. However, the forbearance period will not count toward student loan forgiveness under either IDR or Public Service Loan Forgiveness plans. At least eight million borrowers were affected.

The order also led to confusion throughout the federal student loan system. The Department of Education had to remove online IDR and Direct consolidation applications to ensure it complied with the 8th Circuit’s order. Officials have suspended system-wide processing of all IDR applications while the department’s internal systems are updated. Recent graduates and borrowers who had recently consolidated their federal student loans or used the Fresh Start program to get out of default were unable to enroll everyone As a result, the IDR plan potentially puts them at risk of insolvency if they cannot afford the Standard plan payments. Additionally, borrowers who met the 20- or 25-year student loan forgiveness threshold under ICR or PAYE plans were unable to obtain relief.

Last week, the Ministry of Education issued the so-called updated SAVE plan forbearance guidelines indicating that IDR processing should resume soon and some borrowers will be able to switch to an IBR plan (although they will may have some disadvantages). Officials expect the SAVE plan’s forbearance to last at least another six months.