Two Student Loan Repayment Plans Could Return Any Day

The Biden administration is in the process of reopening two key student loan repayment plan options that had been previously phased out for new enrollees. Officials hope that this will give millions of borrowers some additional options to have lower payments and pursue student loan forgiveness while another key Biden initiative remains blocked due to legal challenges.

The reopening of these plans could happen as soon as this week, according to Education Department announcements. However, officials have not released any additional public details since last month. In addition, it is unclear if the incoming Trump administration will maintain access to these programs.

Here’s what borrowers should know.

SAVE remains blocked, leaving millions frozen out of student loan forgiveness 

The Saving on a Valuable Education (SAVE) plan, President Biden’s signature income-driven repayment (IDR) plan, remains blocked due to a legal challenge. Months after the Biden administration launched SAVE — which was designed to be the most affordable IDR plan with lower payments, a substantial interest subsidy, and multiple paths to loan forgiveness — a coalition of Republican-led states filed a lawsuit to halt the program. In August, the 8th Circuit Court of Appeals issued a nationwide injunction blocking the implementation of the SAVE plan while the litigation continues.

As a result of the injunction, more than eight million borrowers have been put into a forbearance. During the forbearance, no payments are due and no interest should be accruing. But the time spent in the forbearance won’t count toward student loan forgiveness. This includes IDR loan forgiveness (typically on a 20- or 25-year term), as well as Public Service Loan Forgiveness (PSLF). The result is millions of borrowers who were pursuing student loan forgiveness are effectively stuck — a particularly frustrating situation for those who are nearing the end of their loan forgiveness term and want to get back on track.

Technically, borrowers should be able to switch to a different IDR plan to resume progress toward loan forgiveness. As a practical matter, however, this has not been doable for most people. Following the injunction in August, all IDR processing was largely suspended. While IDR processing may have started to resume, the Education Department warns of significant delays due to the backlog. 

Furthermore, as part of the earlier SAVE plan implementation, the department permanently ended new enrollments in the Income Contingent Repayment (ICR) and Pay As You Earn (PAYE) plans, leaving the Income Based Repayment (IBR) plan as the only viable option for most borrowers. While IBR can still result in affordable monthly payments, it tends to be a much more expensive plan than SAVE. In addition, a Partial Financial Hardship (PFH) requirement associated with IBR may limit enrollment for borrowers who have higher incomes relative to their loan balances. The SAVE plan did not have a PFH requirement.

Biden Administration is set to bring back ICR and PAYE plans

The Biden administration announced last month that the Education Department would be bringing back the ICR and PAYE plans so that borrowers stuck in the SAVE plan forbearance have more options to pursue student loan forgiveness.

“The Department is preparing a plan that would open the PAYE and ICR repayment plans to new enrollees, who otherwise meet the eligibility requirements,” said the department in updated guidance in November. “Doing so will allow the Department to meet its obligations under the Higher Education Act to offer borrowers a repayment option through the same authority used to create the SAVE plan. For borrowers who would prefer to make payments during this time period — such as borrowers pursuing PSLF or low-income borrowers who would owe no monthly payments — enrolling in PAYE or ICR may be an option to consider. The Department will share more in the coming weeks on the timeline for this repayment plan change.”
Following the announcement, the department published an interim regulation that then triggered a 30-day waiting period, after which the updates were expected to go into effect and the plans expected to become available again.

The new rule “revises the end date for most borrowers to enroll in ICR or Pay as You Earn plans from July 1, 2024, to July 1, 2027,” explained the department in commentary accompanying the publication of the rule in the Federal Register in November. “This time-limited change to eligibility restrictions that went into effect on July 1, 2024, will allow the Department to meet its statutory obligations while it undertakes the necessary administrative changes to make its repayment plans that would otherwise be available for borrowers compliant with the terms of an injunction from the U.S. Court of Appeals for the Eighth Circuit (Eighth Circuit).”

What borrowers should know about PAYE and ICR plans

Both PAYE and ICR could be viable options for borrowers. But the plans may not be for everyone.

Compared to IBR, PAYE is generally a more affordable repayment plan for borrowers who first took out federal student loans prior to July 1, 2014 (when a newer version of IBR that is similar to PAYE went into effect). In addition, because the PAYE plan uses a more affordable repayment formula, borrowers who don’t qualify for IBR because they don’t meet the Partial Financial Hardship requirement could potentially qualify for PAYE, although this very much depends on the borrower’s specific income and loan balance (and PAYE has its own PFH rule).  

However, PAYE has disbursement date restrictions; to qualify, borrowers must have had:

• No outstanding federal student loan balance as of October 1, 2007, and
• A new federal loan disbursement on or after October 1, 2011. 

That means many borrowers with older student loans may not qualify for PAYE.

ICR, meanwhile, tends to be much more expensive than other IDR plans, including IBR. However, ICR can be a potential option for Parent PLUS borrowers who have consolidated their loans via the Direct consolidation program, as ICR is typically the only IDR option available for parent borrowers. In addition, ICR has a unique feature that can provide relatively lower payments for borrowers who have high incomes compared to their loan balances (effectively converting the plan from an income-based plan to a Standard plan on a 12-year term). This can be useful for borrowers who are nearing the end of their loan forgiveness term for IDR or PSLF and don’t qualify for IBR or PAYE but want to resume progress toward eventual student loan forgiveness.

Borrowers should also be aware that legal and policy developments could impact ICR and PAYE, as well. The 8th Circuit is considering whether or not student loan forgiveness at the end of 20 or 25 years is allowable under ICR and PAYE because those plans were issued under the same legal authority that was used to create the SAVE plan. There is a possibility that the 8th  Circuit could strike down loan forgiveness for ICR and PAYE. Furthermore, it is unclear if the incoming Trump administration will follow through on the Biden administration’s push to reopen ICR and PAYE.

“We encourage borrowers to review the specifics of each IDR plan as borrowers make the best choices for their circumstances,” says department guidance. For example, none of the other IDR plans have the interest benefits that the SAVE plan offers. “If a borrower enrolls in IBR and then moves to a different repayment plan, accrued and unpaid interest will capitalize,” warns the department.

Borrowers can get more information on all IDR plans at StudentAid.gov.