A federal appeals court appears inclined to overturn President Joe Biden’s latest student debt relief initiative, which cuts payments by millions of dollars and clears the way for student loan forgiveness. And a possible wide-ranging decision could also eliminate loan forgiveness under several much older repayment programs.

In August, the 8th Circuit Court of Appeals issued a nationwide injunction block Biden’s SAVE plan while a legal challenge brought by Republican-led states continues. SAVE is the latest income-driven repayment plan, or IDR. Like all IDR plans, the program uses a formula to tie a borrower’s monthly student loan payments to their income and family size, with loan forgiveness at the end of the plan’s repayment term if the borrower does not repay his entire balance. But SAVE is more generous than several older IDR plans, offering borrowers even lower payments and faster student loan forgiveness, as well as an interest benefit that stops ballooning loan balances.

But at a critical hearing last week, a panel of 8th Circuit judges — all Republican appointees — questioned Biden administration lawyers and appeared inclined to strike down the SAVE plan. An unfavorable court decision could have much broader implications for student loan forgiveness under other IDR plansAlso.

Judges Question Student Loan Forgiveness, Reduced Payments Under SAVE Plan

The gist of the arguments made by Republican-led states is that the Biden administration overstepped its statutory authority in creating the SAVE plan and all of its features and benefits.

Congress authorized the creation of IDR plans through legislation passed more than thirty years ago, but has provided few details on what these plans should look like (other than tying student loan payments to income , with a maximum repayment period of 25 years). Congress required the Department of Education to draft regulations establishing the rules for these programs. The Department has done this four times over the past 30 years, creating what we now call the Income-Driven Repayment Plan, the Pay As You Earn Plan, the Revised Pay As You Earn Plan, and the SAVE Plan ( which replaced Revised Pay As You Earn). As you win). These plans are often referred to by their acronyms – ICR, PAYE, REPAYE and SAVE – and all current regulations provide for student loan forgiveness, usually after 20 or 25 years of repayment. Congress passed separate legislation creating income-driven repayment, or IBR, plans.

The states, led by Missouri, argue that Congress did not expressly authorize the SAVE plan’s many benefits. These include a generous income forgiveness cap allowing low-income borrowers to pay nothing, a significant interest subsidy and student loan forgiveness before age 20 or 25 in some cases .

But the states go even further and also suggest that Congress never intended any student loan forgiveness at the end of an IDR repayment term (except IBR). The Biden administration counters that this argument flies in the face of the legislative history associated with establishing IDR plans and 30 years of regulations, policies and guidance that span multiple Democratic and Republican administrations.

In a key court hearing last Thursday, the 8th Circuit’s panel of judges appeared to agree with the states’ arguments.

“If the borrower’s payments are reduced to zero and then canceled, how is that a repayment plan?,” U.S. Circuit Judge L. Steven Grasz asked Biden administration lawyers. during the hearing. Judge Grasz was appointed by former President Donald Trump. Another judge on the panel called the SAVE plan “a massive attempt at loan forgiveness.”

It would only take two judges on a three-judge panel to agree to overturn the SAVE plan.

Legal Challenge Over SAVE Plan Student Loan Forgiveness Expected to Reach the Supreme Court

The 8th Circuit’s current injunction blocking the SAVE plan is intended as a somewhat temporary measure while the legal challenge to the program continues. But after last Thursday’s hearing, it seems highly unlikely that the injunction will be lifted any time soon. And the court could issue a more definitive ruling on the program — and on student loan forgiveness generally under other IDR plans that come from the same legal authority — within a few months.

The 8th Circuit likely won’t have the final say on the future of student loan forgiveness and payment reduction under the SAVE plan. Whatever the decision, it is almost certain that it will be appealed to the United States Supreme Court. While the nation’s highest court may have a different interpretation of the program’s legality, challengers have notably relied on the Supreme Court’s 2023 decision striking down Biden’s first attempt at mass student loan forgiveness to make their case that the SAVE plan should not be continued.

What borrowers should expect in student loan forgiveness and repayment in the coming months

Borrowers who were participating in the SAVE plan when the injunction was issued in August were subject to forbearance. During forbearance, borrowers should not be charged and their balances will not increase due to interest. However, the forbearance period will not count toward student loan forgiveness under the IDR plans and Public Service Loan Forgiveness. At least eight million borrowers have been affected.

The injunction also caused turmoil throughout the federal student loan system. The Department of Education had to remove online IDR and Direct Consolidation applications to ensure they complied with the 8th Circuit order. And officials have suspended processing of all IDR requests systemwide while they update the department’s internal systems. Recent graduates and borrowers who recently consolidated their federal student loans or took advantage of the Fresh Start program to get out of default were unable to enroll in the program. any As a result, they are at risk of default if they cannot afford the Standard plan payments. Additionally, borrowers who reached the 20 or 25 year threshold for student loan forgiveness under the ICR or PAYE plans were unable to obtain discharge.

Last week, the Ministry of Education published updated guidance on forbearance from the SAVE plan indicating that IDR processing is expected to resume soon and some borrowers may be able to transition to the IBR plan (although this is may have some drawbacks). Officials expect the SAVE plan forbearance to last at least another six months.