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What’s next for student loan borrowers as Biden’s repayment plan faces legal battles

Photo MGN
Photo MGN

By Katie Lobosco, CNN

Washington (CNN) — A federal appeals court will allow the Department of Education to proceed with lowering millions of student loan borrowers’ monthly payments in July as the Biden administration faces two legal battles over the repayment plan known as SAVE (Saving on a Valuable Education), which launched last year.

Two groups of Republican-led states filed lawsuits earlier this year challenging the SAVE plan, arguing that the administration does not have the legal authority to implement the plan. Missouri and Kansas judges issued temporary injunctions last week, halting parts of the SAVE plan while the matter can be fully litigated.

SAVE lowers enrolled borrowers’ monthly payments and provides a faster route to debt forgiveness. It was launched by the Biden administration after the president’s sweeping, one-time student loan forgiveness program was struck down by the Supreme Court last summer.

The Missouri judge blocked the Biden administration from canceling any more student loan debt under the SAVE plan. And the Kansas judge said that the Biden administration would not be allowed to fully phase in the SAVE plan in July and lower payments by as much as half for some enrolled borrowers.

The Department of Justice appealed both injunctions. On Sunday, the US Court of Appeals for the Tenth Circuit ruled that the Biden administration can go ahead and lower monthly student loan payments this month as originally scheduled. The appeals court did not overrule the injunction but allows this part of the plan to take effect while the matter is litigated.

Here’s what borrowers need to know:

Payments paused for some borrowers enrolled in SAVE

Nearly 8 million people are enrolled in SAVE, and roughly 3 million of them were expecting to see lower payments as of July 1 when the SAVE plan was fully phased in.

After the injunctions were put in place last week, the Department of Education said that those 3 million borrowers would be put in a forbearance – during which payments would not be required and interest would not accrue – while the matter was litigated.

But after the appeals court sided with the Biden administration on Sunday, the Department of Education can move ahead and make those reductions.

Some affected borrowers had not yet been placed in a forbearance. If those borrowers already received a bill from their loan servicer that reflects the new, lower payment for July, they should make that payment.

Those borrowers who were put in a forbearance last week due to the injunction will remain in a payment pause in July and be required to make their new, lower monthly payment starting in August.

About 4 million other borrowers enrolled in SAVE already have a $0 monthly payment. SAVE is an income-driven repayment plan, which calculates payments based on a borrower’s income and family size. Payments can be as low as $0 for people earning $30,000 or less a year.

Student debt forgiveness under SAVE halted

Borrowers enrolled in SAVE may be eligible for student debt relief in a shorter amount of time than under other income-driven repayment plans.

Those who borrowed $12,000 or less will see their debt forgiven after paying for just 10 years under SAVE. Every additional $1,000 borrowed above that amount would add one year of monthly payments to the required time a borrower must pay. Under other repayment plans, borrowers must make at least 20 years of payments before receiving debt forgiveness.

To date, $5.5 billion has been canceled for 414,000 people enrolled in SAVE.

But the Missouri court’s injunction that remains in place blocks the Biden administration from canceling anymore student debt under SAVE until the matter is fully litigated.

Online access to SAVE application will be restored

When the injunctions were put in place last week, the Department of Education took down the online application for any income-driven repayment plans, including SAVE, so that it could update its systems to reflect the injunctions.

As of July 1, the department said it is working on reinstating the online application.

The Department of Education said that borrowers should check in regularly with and subscribe here to receive the latest information.

How does SAVE work?

Like existing income-driven repayment plans, SAVE offers lower monthly payments for people with lower incomes. But the SAVE plan offers the most generous terms.

SAVE lowers monthly payments in two ways compared with other federal student loan repayment plans.

First, it recalculates discretionary income so that it’s equal to the difference between a borrower’s adjusted gross income and 225% of the poverty level. Existing income-driven plans calculate discretionary income as the difference between income and 150% of the poverty level.

Under most income-driven repayment plans, borrowers are required to pay 10% of their discretionary income. But borrowers enrolled in SAVE will see those payments cut by as much as half in July.

Payments on loans borrowed for undergraduate school will be reduced from 10% to 5% of discretionary income. Borrowers who have loans from both undergraduate and graduate school will pay a weighted average of between 5% and 10% of their income based upon the original principal balances of their loans.

The SAVE plan also prevents balances from ballooning due to interest when a borrower has a small monthly payment. If enrolled in SAVE, unpaid interest does not accrue if a borrower makes a fully monthly payment. For example, if $50 in interest accumulates each month and a borrower’s full required payment is just $30, the remaining $20 would be waived.

Confusion for borrowers

The court injunctions impacting the SAVE plan come at a time when many borrowers were already experiencing issues with their student loan payments – which resumed last fall after a three-plus year pause during the Covid-19 pandemic.

Some borrowers were recently put in an administrative forbearance because their accounts were being transferred from one loan servicer to another. Others were being put in a forbearance because the recalculation of their payments under SAVE had not been completed yet.

“This may just be politics to the leaders of Missouri and Kansas, but for 40 million people trying to manage their student loans, it’s chaos,” Abby Shafroth, co-director of Advocacy at the National Consumer Law Center, said in a statement.

This headline and story have been updated with additional developments.

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