Student loan borrowers enrolled in a new federal repayment plan could see their monthly payments cut in half in the near future, thanks to last-minute relief from a federal appeals court.
However, the legal dispute at the moment is causing confusion in the student-aid system, throwing millions of borrowers’ monthly payments into doubt. And the relief granted by the court was only temporary, so Savings on valuable education plan, Or SAVE may not be able to offer lower payouts 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’re in is not fair to student loan borrowers.”
The Education Department continues to work on a separate rule that would provide debt relief to an estimated 30 million student borrowers. But that effort will almost certainly go to court, too.
Here’s the latest information on what the situation is like for federal student loan borrowers.
What’s happening with student loans?
First and foremost, the only program affected by the legal upheaval is the SAVE plan, which is only available for federal student loans. Private loans and other loan repayment programs continue to operate as normal.
The SAVE plan was designed to reduce monthly payments and forgive loans faster for borrowers with smaller loans. Both of these efforts have been challenged in court by Republican officials in several states.
SAVE allows borrowers to make monthly payments based on their income, not the amount they borrowed. In return, most borrowers have to continue making payments under a standard plan, in which the loan is paid off over 10 years. Under SAVE, the typical borrower makes payments for up to 20 years on undergraduate loans and 25 years on graduate school loans. After that, any unpaid balance is forgiven.
Starting July 1, monthly payments on graduate loans for those enrolled in the SAVE plan were set to be cut in half, dropping from 10% of their discretionary income to 5%. But in early June, the Department of Education notified borrowers that those whose next payment was due in the first part of July would be put in deferment for a month while their monthly bills were recalculated. Their next payment would be due in August and, for graduate loans, based on 5% of their discretionary income.
Last week, a federal judge in Kansas issued a temporary injunction blocking the Education Department from lowering the repayment rate to 5%. The department responded by telling 3 million additional SAVE participants that they, too, would be placed in loan discharge until August while their monthly payments were recalculated. However, unlike other borrowers in loan discharge, these borrowers’ repayment periods would be extended by a month, 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 suspended the injunction 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 US Supreme Court for a possible reversal.
What should borrowers do in the SAVE scheme?
SAVE Plan borrowers who received notice that they are temporarily in forbearance will remain in forbearance until August. However, some SAVE Plan participants had already received bills from their loan servicer for July, showing a 5% repayment rate. The department says these borrowers must make their payments this month.
Those least affected by the legal wrangling are the roughly 4.5 million SAVE plan borrowers whose incomes are so low that their monthly payments are $0.
Borrowers who are unsure about where they stand should first log in studentaid.gov to see if they’re enrolled in the SAVE plan. If they are enrolled, 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, as many other borrowers are also trying to contact their service providers. “From what I’ve heard, it’s difficult to do,” Yu said. “If they can get the information online, that’s probably the ideal solution.”
Otherwise, he said, SAVE participants will have to wait for more information from the Department of Education and their loan servicer, no matter how inconvenient that might be.
Can borrowers from other plans sign up for SAVE?
Yes. The department temporarily shut down its online application portal after the injunction was issued, but loan servicers are still accepting loans. Downloadable Application Form The department has made that information available at studentaid.gov. Abrams said the department hopes to reopen its online application portal soon.
In addition to payments based on 5% of discretionary income, the plan offers borrowers more relief by increasing the amount of income considered non-discretionary to 50%. And if the reduced monthly payment isn’t enough to cover the interest owed on the loan, the SAVE plan waives the extra interest charges instead of adding them to the borrower’s loan.
What about debt relief?
A federal judge in Missouri last week issued a temporary injunction against a provision of the SAVE plan that would have forgiven the balance after 10 years of repayment for anyone who borrowed no more than $12,000 in undergraduate loans. (The loan forgiveness would delay payments by one year for every additional $1,000 borrowed.)
That injunction did not fall within the appeals court’s stay.
In addition, the Biden administration is finalizing an agreement. Proposed rules This would cancel the loans of borrowers who have been paying their undergraduate loans for at least 20 years or their postgraduate school loans for at least 25 years. Importantly, the rule would also reduce or eliminate unpaid interest charges accrued by approximately 25 million borrowers, including all interest not paid by borrowers in income-driven repayment plans.
Though many who commented on the rule supported it, Yoo said, not everyone did. Opponents of Biden’s student debt relief measures have argued that it’s not fair to pass the cost of college on to taxpayers, many of whom have made sacrifices to pay off their student loans.
Still, Yu said, even people who have repaid their loans “overwhelmingly support loan forgiveness” because they understand how burdensome the cost of college has 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 for future generations,” she said.
When the administration presented their plans For student loan relief in April, it also said it would seek to partially or fully cancel the debt of borrowers who were facing financial difficulty repaying their federal loans. The administration has not yet proposed any rules to implement that change, however, and more than 220 groups representing borrowers, workers, veterans, people with disabilities and consumers submitted a letter to the Education Department on Monday urging it to move immediately.
“The Supreme Court’s conservative majority caused millions of borrowers to lose comprehensive relief hit the bottom “This is a major upgrade to President Biden’s original debt relief program,” the letter states. The hardship rule “represents a ray of hope for millions of borrowers and their families who have been forced to wait nearly two years for much-needed relief,” it adds.
Abrams said thousands of people have written to the White House urging immediate action on the hardship proposal. She said if the rulemaking process begins too late this year, implementation of the final rule would be delayed until next year — when Biden may no longer be president.
