The 8th Circuit Court of Appeals ruled on July 18 that the SAVE income-driven repayment plan, intended to lower borrowers’ monthly payments and give them a shorter timeline for debt cancellation, be blocked in its entirety as the legal process continues.
After the rulings, the Department of Education placed 8 million borrowers on the SAVE plan on forbearance. During this period, interest will not accrue, but borrowers will not receive credit towards loan forgiveness through Public Service Loan Forgiveness (PSLF) and income-driven repayment plans.
The Biden administration introduced the SAVE plan to replace the Revised Pay As You Earn (REPAYE) plan. It aimed to provide more generous terms than previous income-driven repayment (IDR) plans, including lower monthly payments based on a borrower’s discretionary income and faster loan forgiveness for those with smaller loan balances. However, recent court rulings in Kansas and Missouri have halted key provisions of the plan, leading to significant financial disruptions for borrowers who had planned their finances around the expected relief.
The New Options by the Education Department
The Education Department has recently updated its guidelines on what the forbearance period means for borrowers, along with two avenues for borrowers to receive forgiveness credit despite the forbearance.
Option 1: Switching to a New Income-driven Repayment Plan
With the blocking of the SAVE plan, borrowers can revert to traditional IDR plans such as Income-Based Repayment (IBR), Income-Contingent Repayment (ICR), and Pay As You Earn (PAYE). These plans calculate monthly payments based on a percentage of the borrower’s discretionary income and offer loan forgiveness after 20 or 25 years of qualifying expenses.
Key Features of Traditional IDR Plans:
- Income-Based Payments: Monthly payments are typically set at 10-15% of discretionary income, depending on the specific plan.
- Loan Forgiveness: Any remaining loan balance is forgiven after 20 or 25 years of qualifying payments.
- Interest Subsidies: Some plans offer interest subsidies to prevent loan balances from growing excessively due to interest accrual.
However, this option could have complications because, due to legal challenges, online applications are currently unavailable. Borrowers would have to mail their forms to their servicer.
The guidance said, “Borrowers should expect a lengthy delay in processing applications, especially for borrowers applying for SAVE/REPAYE.” “We do not currently have an estimate of how long this will take.”
Aside from switching repayment plans to receive credit towards forgiveness, another option was highlighted by the Education Department. The second option is for borrowers on PSLF to receive forgiveness credit: a “buyback.”
Option 2: Receiving Forgiveness Credit: a “buy back”
Through a process the department made available last fall, borrowers can buy back months of PSLF credit for any time spent in forbearance if the borrower already has 120 months of qualifying employment.
However, this option is only possible if borrowers meet these conditions:
- They have an outstanding balance on their loans
- Their employment has been approved as qualifying for PSLF
- By buying back the months in forbearance, they will complete their total of 120 qualifying payments.
If the borrowers meet these conditions, they can submit a request here.
Despite these two options, the department has advised borrowers to exercise caution when considering them due to the uncertainty surrounding the lawsuits.
“Different IDR plans may require higher monthly payments than the SAVE/REPAYE Plan does, and, in the case of some IDR plans, borrowers who later leave them may face interest capitalization,” the department said. “However, payments made under these IDR plans will count toward forgiveness under IDR and PSLF.”
