SAVE Lawsuits: What Student Loan Borrowers Face Now
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Two federal judges derailed portions of the Saving on a Valuable Education (SAVE) repayment plan on Monday, days before reduced payments were slated to go into effect for millions of borrowers.
A Missouri judge ruled that the Education Department could not continue forgiving small principal student loan balances in just 10 years under the SAVE plan. And in Kansas, a judge blocked the department from rolling out the final components of the SAVE plan as scheduled on July 1 that would have cut monthly bills in half for borrowers with undergraduate loans only, among other benefits.
“We strongly disagree with the Kansas and Missouri District Court rulings, which block components of the SAVE Plan that help student loan borrowers have affordable monthly payments and stay out of default. The Department of Justice will continue to vigorously defend the SAVE Plan,” U.S. Secretary of Education Miguel Cardona said in a statement.
SAVE, which debuted in August, offers lower payments and more benefits than other income-driven repayment (IDR) plans. It forgives remaining debt in as little as 10 years for those with an original principal balance of $12,000 or less instead of 20 or 25 years on other IDR plans. It waives any interest left over after borrowers make their assigned monthly payments, preventing ballooning student loan balances. Those earning less than $67,500 as a family of four, or less than $32,800 as an individual, even qualify for $0 payments.
About 8 million borrowers are enrolled in SAVE, representing 1 in 5 borrowers with outstanding federal student loans. Of the 8 million SAVE borrowers, 4.6 million have a low enough income to qualify for $0 payments.
How the rulings impact SAVE borrowers
The most immediate impact of the Kansas court order: As many as 3.4 million borrowers who owe payments under SAVE won’t see smaller bills starting in July. The Education Department was gearing up to shrink monthly payments for borrowers with only undergraduate loans, from 10% of their discretionary income to 5%. (Borrowers with both undergraduate and graduate loans would have seen payments calculated at a weighted average between 5% and 10%.)
Other SAVE provisions slated to go into effect July 1 won’t happen as scheduled, either. That includes automatic SAVE enrollment for borrowers who are at least 75 days behind on payments, which could reduce default rates. Another provision would have given borrowers automatic credit toward SAVE forgiveness for most past periods of forbearance and deferment.
The Missouri ruling blocks borrowers with lower principal balances from getting accelerated forgiveness going forward. Since February, the department has already approved about $5.5 billion worth of student debt forgiveness for 414,000 SAVE borrowers.
Previous waves of SAVE forgiveness are likely safe, says Mike Pierce, executive director and co-founder of the Student Borrower Protection Center, a nonprofit organization that advocates for student debt relief. The court order does not impact the 20- or 25-year forgiveness timeline for SAVE borrowers who took out amounts of debt greater than $12,000.
“I would not expect, no matter where this goes, for people who are now debt-free to have to worry about the government coming back to them and saying, ‘No, actually, the court says we got it wrong, so you have to pay your bills now,’” Pierce says. “But for everybody else, people who are relying on these lower monthly payments, that's very much in peril.”
Student loan servicers recently notified some borrowers about a July administrative forbearance due to SAVE plan changes. Most likely, that July forbearance will continue as planned and payments will resume in August, though servicers are still waiting on official Education Department direction, says Scott Buchanan, executive director of the Student Loan Servicing Alliance. If you have questions about the July forbearance, wait a few days before contacting your servicer.
“I would encourage borrowers to hold off and wait until we get more information about how the government is going to proceed here, because if they call today and say, ‘Hey, what's happening in August?’ I don't think anyone's going to have an answer,” Buchanan says.
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What could happen next with the SAVE lawsuits
The dual court orders were both preliminary injunctions, which means they are not yet final rulings.
“The court has not made a decision about whether or not the SAVE plan is legal, so the states asked the court to temporarily pause the full SAVE regulations while the court considers whether or not the actions by the administration were lawful,” explains Pierce.
Next, the Justice Department will decide whether it will appeal these injunctions and ask an appellate court to review them or litigate the cases in front of these judges and try to prove that the SAVE plan is legal.
In either case, it’s unlikely that SAVE borrowers will be impacted by further legal updates in the “very near-term,” Pierce says. “It's possible the administration is going to fight tooth and nail to roll back these injunctions. We'll know more in the coming days, but as of right now, assuming these cases stay in front of these trial court judges, we're talking about months here.”
The future of the SAVE plan remains uncertain. In the meantime, SAVE continues to stand in its current form, minus the forgiveness portion. Borrowers enrolled in the plan should continue to make payments as usual, and borrowers who aren’t yet on SAVE can still sign up.
“While we continue to review these rulings, the SAVE plan still means lower monthly payments for millions of borrowers — including more than 4 million borrowers who owe no payments at all, and protections for borrowers facing runaway interest when they are making their monthly payments,” Education Secretary Cardona said.
