Student loan borrowers enrolled in a new federal repayment plan could see their monthly payments cut in half in the near future thanks to a last-minute stay by a federal appeals court.
But now, legal disputes are sowing chaos across the student aid system, with millions of borrowers’ monthly payments being called into question. And the relief granted by the court is only temporary, so SAVE may not reduce payments in the long run.
“It’s almost impossible to know what to do at this point,” said Persis Yu, deputy executive director of the Student Borrower Protection Center. “The situation we are in now is not fair to student loan borrowers.”
The Department of Education continues to develop a separate rule to provide debt relief to an estimated 30 million student borrowers. But that effort will almost certainly end up in court, too.
Here’s the latest on what’s happening for federal student loan borrowers.
What happened to student loans?
First and foremost, the only program affected by the legal turmoil is the SAVE program, which only applies to federal student loans. Private loans and other loan repayment programs continue to operate as normal.
The SAVE program is designed to lower monthly payments and, for borrowers taking out smaller loans, lead to faster debt relief. Both efforts are being challenged in court by Republican officials from several states.
SAVE allows borrowers to make monthly payments based on income rather than the amount borrowed. In exchange, most borrowers must continue to make repayments longer than under the standard plan, where the debt is paid off in 10 years. According to SAVE, typical borrowers have repayment terms of 20 years for undergraduate loans and 25 years for graduate loans. Any unpaid balance will then be forgiven.
As of July 1, monthly loan payments for undergraduate students participating in the SAVE program are expected to be cut in half, from 10% to 5% of discretionary income. But in early June, the Department of Education notified borrowers whose next payment was due in the first half of July that they would be delayed by a month while their monthly bills were recalculated. Their next payment is due in August and, for undergraduate loans, is based on 5% of their discretionary income.
Last week, a federal judge in Kansas issued a temporary injunction preventing the Department of Education from lowering the repayment rate to 5%. The department responded by telling another 3 million SAVE participants that they would also be deferred until August while their monthly payments were recalculated. However, unlike other borrowers in forbearance, these borrowers will have their repayment period extended by one month, said 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 put the ban on hold pending the department’s appeal. It’s impossible to predict how long relief will last because even if the department prevails on appeal, the case could move to the U.S. Supreme Court for possible reversal.
What should borrowers in the SAVE program do?
SAVE borrowers who receive temporary deferment notices will continue to have deferrals through August. However, some SAVE participants have received July bills from their loan servicers, which include a 5% repayment rate. The department said those borrowers are due to make payments this month.
SAVE borrowers least affected by the legal flip-flop are the estimated 4.5 million people who have low incomes and have monthly payments of $0.
Borrowers who are unsure about their situation should first log on to Studentaid.gov to see if they are enrolled in the SAVE program. If so, the next step is to ask their loan servicer—whose contact information should also be available on studentaid.gov—when their next payment is due and how much they owe.
This can be difficult to do considering there are many other borrowers trying to contact their servicers. “As far as I know, it’s very difficult to get through,” Yu said. “If they can find the information online, that might be the ideal solution.”
Otherwise, she said, SAVE participants will need to wait for more information from the Department of Education and its loan servicers, as uncomfortable as that may be.
Can borrowers in other programs sign up for SAVE?
Yes. Following the ban, the department temporarily closed its online application portal, but loan servicers continue to accept downloadable application forms provided by the department on Studentaid.gov. Abrams said the department expects to reopen its online application portal soon.
In addition to making payments based on 5% of discretionary income, the program also gives borrowers more breathing room by increasing the amount of non-discretionary income by 50%. If the reduced monthly payment is not enough to cover the interest accrued on the loan, the SAVE program will waive the excess interest fee instead of adding it to the borrower’s debt.
What about debt relief?
A federal judge in Missouri last week issued a temporary injunction against a provision of the SAVE program that would forgive the unpaid balance after 10 years for anyone who borrowed up to $12,000 in undergraduate loans. . (For each additional $1,000 you borrow, loan forgiveness delays payment for one year.)
The appeals court’s stay ruling did not include that injunction.
Separately, the Biden administration is finalizing a proposed rule that would cancel the debt of borrowers who have paid off their undergraduate loans for at least 20 years or their graduate loans for at least 25 years. Notably, the rule would also reduce or eliminate unpaid interest charges accrued by approximately 25 million borrowers, including all unpaid interest for borrowers on income-driven repayment plans.
So while many who commented on the rule supported it, not everyone did. Opponents of Biden’s student debt relief measure argue it’s unfair to shift the cost of college to taxpayers, many of whom have made sacrifices to pay off their student loans.
Still, even those who have paid off their loans are “overwhelmingly supportive of debt cancellation,” Yu said, because they understand how burdensome college costs have become and the struggles borrowers face. “Young people are now unable to start families, buy homes, start businesses, and that’s not what we want to see for future generations,” she said.
When the government laid out its student debt relief plan in April, it also said it would seek to partially or fully cancel the debt of borrowers experiencing financial difficulty repaying their federal loans. However, the administration has yet to propose rules to implement the change, prompting more than 220 groups representing borrowers, workers, veterans, people with disabilities and consumers to submit a letter to the Education Department on Monday urging it to take immediate action.
“When the Supreme Court’s conservative majority struck down President Biden’s original debt relief plan, tens of millions of borrowers were deprived of comprehensive relief,” the letter said. The report added that the hardship rule “set the stage for hundreds of borrowers to A glimmer of hope for millions of borrowers and their families who were forced to wait nearly two years for much-needed relief.”
Thousands of people have also written to the White House urging immediate action on the difficult proposals, Abrams said. If the rulemaking process begins too late this year, implementation of the final rules will be delayed until next year, when Biden may no longer be president, she said.
