What Federal Student Loan Borrowers Need to Know Amid the SAVE Plan Legal Battles

On Monday, June 24, 2024, two federal judges halted the second rollout phase of the Saving on a Valuable Education (SAVE) federal student loan repayment plan. The decision, stemming from lawsuits filed by several Republican-led states, paused the implementation of new measures set to take effect on July 1, 2024. These rulings add another layer of complexity for federal student loan borrowers already grappling with the evolving landscape of repayment options.

The Context: Legal Challenges to SAVE

The SAVE plan, introduced by the Department of Education (DOE) following the Supreme Court's rejection of the One-Time Student Loan Forgiveness Proposal, was designed to offer significant relief to borrowers. By using a different legal mechanism to bypass the usual congressional approval process, it became law on October 1, 2023. However, concerns about its constitutionality and financial impact—highlighted by a Wharton study estimating its cost at over $600 billion—have fueled legal challenges.

Current Status of the SAVE Plan

The judges' orders have halted specific provisions of the SAVE plan, including:

🎯Monthly Payment Calculation Adjustment: The plan's shift to a 5% payment factor for undergraduate loans, and a new weighted average for borrowers with mixed loan types, is paused. Currently borrowers in the SAVE plan have payments based on 10% factor of their household discretionary income regardless of whether loans were for graduate or undergraduate education.

🎯Loan Forgiveness: The planned forgiveness for original loans under $12,000 after 12 years of payment history is on hold.

🎯Limitations on Switching Plans: Restrictions on switching to other Income-Driven Repayment (IDR) plans are temporarily suspended. This potentially establishes a loophole for borrowers to have greater flexibility with switching plans for the time being.

Despite these setbacks, the initial phase of SAVE remains in effect, providing some continuity for borrowers. However, the future of the plan is uncertain, especially with the potential for a full repeal that could revert borrowers to the previous Revised Pay As You Earn (REPAYE) rules.

Who is Affected?

Approximately 8 million borrowers enrolled in the SAVE plan are now in a state of limbo. The DOE had heavily promoted SAVE for its advantages over other Income-Driven Repayment (IDR) plans. The possibility of these benefits being revoked adds to the uncertainty, especially for those who had made financial decisions based on the new terms that were set to be put into motion come July 1st, 2024.  This does not infer that the decision to enter the SAVE plan is a complete BUST but it might adjust the borrowers initial forecast for what to expect. 

Impact on Borrowers

One of the most attractive features of SAVE was its no-negative amortization policy, which prevented loan balances from growing due to unpaid interest. This was particularly beneficial for high-debt borrowers. The elimination of the older Pay As You Earn (PAYE) plan, with its shorter forgiveness period for graduate debt, further complicated the decision-making process for borrowers. Those who switched to SAVE might now need to reassess their choices, especially if the plan is rescinded and they are pushed back to REPAYE terms.  There may still be options for these such borrowers to opt into a separate IDR plan such a NEW Income-Based Repayment (New IBR) which mirrors that of the PAYE plan which is set to sunset July 1st, 2024.

What Borrowers Should Do Now 

Given the current legal battles and the potential for further changes, here are a few steps federal student loan borrowers should consider:

📌Stay Informed: Keep up-to-date with the latest developments in the court cases and any announcements from the DOE.

📌Review Your Repayment Plan: Assess your current repayment plan and consider how potential changes might affect your payments and loan forgiveness timeline.

📌Consult with a Certified Student Loan Professional (CSLP®): Seek advice from at trusted and experienced financial professional that has completed extensive training and education to assist you in further understanding the implications of switching plans or staying with your current one.

Prepare for Administrative Forbearance: The DOE has placed borrowers in yet another administrative forbearance for the month of July, giving borrowers some time to adjust to any new repayment calculations that may come into effect.
 

Looking Ahead

The Biden Administration is expected to appeal the decisions from Kansas and Missouri. Secretary of Education Miguel Cardona has expressed disappointment but also emphasized the value of the unchanged provisions. For now, borrowers are left in a state of uncertainty, making it crucial to stay informed and nimble in managing their student loans.

The legal challenges to the SAVE plan underscore the broader issues facing the federal student loan system. As the courts continue to deliberate, borrowers must navigate this uncertain terrain with caution and adaptability. The goal remains clear: to find a stable and manageable path to repaying their loans while leveraging any available relief options along the way.

In Conclusion

In these turbulent times, staying informed and proactive is essential for federal student loan borrowers. By understanding the current landscape and preparing for potential changes, you can better navigate the complexities of your repayment journey.  If you’ve been working with a trusted financial professional to design and forecast a repayment strategy, you should review the original plan and begin to work through potential modifications as new data is released.  If you’re not working with a trusted financial professional at this time we are currently accepting new planning clients and welcome the opportunity to sit down with you to see if the services we offer align with what you might be seeking in a client-planner relationship!

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