While all eyes are focused on the ongoing presidential campaign, a key issue from the last election cycle has gone from a simmer to boiling over: Legal challenges to the Biden-Harris administration’s latest income-driven repayment (IDR) plan have quietly upended the student-loan-repayment system, incurring massive costs to taxpayers and uncertainty for millions of borrowers.
The plan in question, now known as Saving on a Valuable Education (SAVE), was introduced by President Biden in 2022, at the same time as the proposal for across-the-board debt forgiveness. The Supreme Court blocked the forgiveness plan last summer, but the SAVE plan went forward and opened for enrollment in August 2023.
The SAVE plan had already enrolled almost 8 million borrowers when two groups of Republican attorneys general filed separate lawsuits against SAVE, resulting in an injunction that the Supreme Court let stand in August. Borrowers must now await the outcome of a district-court hearing on October 24, which will likely be followed by appeals to the Supreme Court, potentially taking over a year to resolve.
At first glance, the injunction might not seem very threatening. Borrowers enrolled in SAVE have been placed in interest-free “general forbearance,” similar to the 42-month Covid-19 payment pause. Many borrowers will surely welcome an interest-free loan, but this is costly to taxpayers — in the ballpark of $2 billion per month.
However, the legal limbo creates big problems for borrowers, too. Borrowers in IDR plans can have their balances forgiven after making payments based on their income for between 10 and 25 years. But while the injunction stands, those enrolled in SAVE can’t receive credit toward forgiveness, delaying their payment schedule and postponing debt forgiveness.
The judicial turmoil has also created confusion, among other barriers. SAVE borrowers wondering if they should switch to another IDR plan will find unclear and conflicting guidance on the Department of Education and Federal Student Aid websites. The Department of Education says borrowers can still apply to SAVE or another IDR plan called Income Based Repayment, but two other IDR plans have been closed to new enrollment. The Department disabled the online IDR application in July, telling borrowers to submit a paper application to their servicer. The online application recently became available again, but it’s unclear whether applications are being processed at all, or what borrowers who filed a paper application should do now.
Aside from the usual ebb and flow of borrowers who want to enter IDR because they lost their job or saw their earnings decline, three additional groups of borrowers will increasingly be looking for IDR plans. Over six million borrowers took advantage of the “on-ramp” following the Covid-payment pause, which protected borrowers from the worst consequences of not making payments. Similarly, participants in the Fresh Start program, which allowed borrowers who had defaulted to get back into repayment, will also likely need an IDR option. Both the “on-ramp” and Fresh Start programs ended in early October. Finally, borrowers who graduated last spring, many of whom would benefit from an IDR program, are nearing the end of their grace periods and will have to start loan payments soon.
All of this uncertainty forces students to make important financial decisions without vital information about what their repayment options will look like. Plans for major purchases like a car or a house are made even more complicated since it’s unclear when repayment will resume and whether it will be through SAVE, an IDR program with less generous terms, or a conventional plan.
So, what can be done? Unfortunately, the legal uncertainty limits the options. But the Department of Education should clarify what options are legally available for borrowers and make sure applications are actually processed. The Department should also be honest with borrowers about the possibility that the SAVE plan might not survive the legal challenge.
Servicers and colleges also need guidance. They’re often the go-to sources of information for students concerned about borrowing and repayment, and they need to be able to provide clear answers and good advice.
The Department of Education should ensure that critical finance functions work well for students and borrowers: No agency should be asking people to print and fax paper forms in 2024.
After nearly five years of Covid-related payment pauses, failed debt-forgiveness efforts, and Supreme Court interventions, the credibility of the student-loan program needs to be restored. Repeatedly changing the rules threatens to undermine faith in the system and the government more broadly.
Reauthorization of the Higher Education Act is more than a decade overdue. IDR is an important program to protect borrowers with low earnings, but it cannot be the only tool to improve affordability in higher education. Together with the next administration, Congress needs to address affordability, accessibility, and accountability in higher education — and it should do so comprehensively.
