Should Borrowers Stay in the SAVE Plan Forbearance?

Millions of borrowers are in forbearance as legal challenges over a signature Biden administration initiative continue. Following a recent court ruling, the forbearance looks likely to continue for the foreseeable future, while even more uncertainty looms for borrowers.

The SAVE plan: What it is and why it’s under fire

The Saving on a Valuable Education (SAVE) plan is a new income-driven repayment (IDR) plan. It replaced the older Revised Pay As You Earn (REPAYE) plan last fall and is designed to lower payments, stop runaway interest accrual, and give borrowers a shot at eventual student loan forgiveness. More than eight million borrowers have enrolled in the SAVE plan or were automatically converted from REPAYE.

Republican states take aim at SAVE

However, two groups of Republican-led states sued the Biden administration to stop the SAVE plan, arguing that the program exceeded what Congress intended when it authorized IDR plans. 

In July, a federal appeals court temporarily blocked the SAVE plan as it considered whether to impose a preliminary injunction, which is a broader and longer-lasting order. Last week, the appeals court issued its ruling and granted that preliminary injunction, suggesting not only that SAVE is halted for the foreseeable future, but that the program may ultimately be struck down. 

“The Administration strongly disagrees with the Eighth Circuit’s decision blocking the Biden Administration’s SAVE plan,” said Education Secretary Miguel Cardona in a statement on Monday. “If allowed to stand, this ruling would force millions of borrowers to pay hundreds of dollars more each month. And the decision’s reasoning could also deny loan forgiveness to individuals who were expecting it after up to 25 years of faithful repayments.”

Related: SAVE Plan Blocked: The Court’s Ruling Explained

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Forbearance: Temporary relief or long-term risk?

Following the initial temporary stay in July, the Biden administration placed millions of borrowers enrolled in SAVE into an administrative forbearance, suspending their payments. After the court then replaced the temporary stay with the preliminary injunction last week, Cardona confirmed that borrowers will remain in forbearance while the litigation continues. But while forced forbearance has some benefits, it also has some potentially serious downsides, and borrowers are faced with a difficult decision about what to do.

Related: 10 Types of Student Loan Deferment and Forbearance

Key features of the SAVE plan forbearance

The main benefits of the SAVE plan forbearance include:

• No payments are due during the forbearance period.
• No interest will accrue, preventing balance growth.

“You are being placed into a forbearance because your servicer is not currently able to bill you at the amount required by a recent court order,” explains Education Department guidance. “The court order is preventing ED from offering the SAVE Plan while litigation continues. During forbearance, borrowers are not required to make payments. Interest will not accrue during this forbearance.”

But while borrowers will not have to make payments and will not see their balances increase due to interest accrual, there are important drawbacks:

• The forbearance period will not count toward student loan forgiveness under IDR plans or Public Service Loan Forgiveness (PSLF).
• Payments made during forbearance will not advance forgiveness but will be applied to future bills.

Borrowers can make payments, but doing so will not make the months count toward student loan forgiveness; instead, those payments “will be applied to future bills due after the forbearance ends,” says the department.

If the forbearance is a short-term program, this may be of little concern for borrowers. But if it lasts for quite some time, it could significantly extend loan forgiveness timelines. Given the uncertainties of litigation, the Education Department cannot say how long the forbearance will last.

Switching from SAVE: Alternatives for borrowers

The Education Department confirmed that borrowers who don’t want to be in the SAVE plan forbearance can switch to a different repayment plan, including another IDR plan. This may be an attractive option for borrowers who want to continue progressing toward loan forgiveness under IDR plans or PSLF.

But the process of switching won’t necessarily be fast or straightforward. The Education Department has temporarily taken down the online IDR application as it updates its internal systems to comply with the preliminary injunction, and it’s unclear when the application will go back up. 

In the meantime, borrowers can submit a paper IDR application, but processing is currently paused, and the department will place borrowers into forbearance until processing resumes, says official guidance. And even then, borrowers should expect “lengthy delays.”

Temporary return of ICR and PAYE plans

One upside, however, is that two IDR plans that were supposed to sunset on July 1, 2024, are now technically available again. Income-Contingent Repayment (ICR) and Pay As You Earn (PAYE) are two older IDR plans that were to be phased out in conjunction with the full implementation of the SAVE plan regulations. But with those regulations now enjoined (or blocked) by the courts, ICR and PAYE are back – at least for now.

Why IBR may be a safer choice for loan forgiveness

Another option is borrowers subject to the SAVE plan forbearance could switch to the Income-Based Repayment (IBR) plan. From a legal perspective, this could be a potentially attractive option because IBR is rooted in a different legal authority than SAVE, ICR and PAYE. 

The latter plans are all based on a provision of the Higher Education Act (HEA) that authorizes the creation of IDR plans. Essentially, the HEA provides basic parameters for IDR programs — i.e., payments cannot exceed 20% of discretionary income, and repayment terms cannot exceed 25 years. The statute leaves the rest to the Education Department and instructs the department to draft regulations establishing specific IDR plans. 

The department has done this several times, creating ICR in 1994, PAYE in 2012, REPAYE in 2015 and SAVE in 2023. 

Legal uncertainty and the HEA’s impact on loan forgiveness

But concerningly, the federal appeals court that issued the preliminary injunction blocking the SAVE plan suggested that student loan forgiveness under the HEA’s IDR provision may not be allowable, despite 30 years of official guidance to the contrary and clear intent by Congress that borrowers should not have to pay beyond 25 years (borrower advocates ask, what else — other than loan forgiveness — is supposed to happen to the debt after 25 years if borrowers don’t have to pay it in accordance with the statute?). 

The court’s conservative panel found that because the HEA provision does not explicitly mention loan forgiveness — only that borrowers don’t have to pay after 25 years — it’s open to interpretation. Depending on the scope of the final ruling, there is a possibility that loan forgiveness under these other IDR plans could called into question. 

But IBR was passed under a different statute, and that statute expressly authorizes student loan forgiveness after 25 years. Thus, switching to IBR could be a safer bet for borrowers looking to continue progressing toward eventual loan forgiveness. However, this comes at a cost — IBR is more expensive than SAVE and does not have an interest subsidy that prevents runaway balance growth. 

A non-IDR plan is also an option

Another option for borrowers is to switch to a non-IDR plan, such as a Standard, Extended or Graduated repayment plan. The main benefit is that switching to one of these plans should be fairly easy, as borrowers would not encounter the administrative hurdles currently plaguing the IDR portion of the student loan repayment system.

But in general, payments under these plans do not count toward student loan forgiveness under IDR or PSLF (the one exception is that payments made under the 10-year Standard plan can count toward PSLF). For many borrowers with high balances, payments under non-IDR plans may simply be too expensive to afford.

Additional student loan forgiveness and repayment considerations

As if the student loan landscape wasn’t confusing enough for borrowers, there are other factors to consider.

The Biden administration is planning on rolling out a new student loan forgiveness plan this fall, potentially in only a matter of weeks. And while the Education Department is still finalizing the details of that initiative, one of the groups of borrowers who could qualify are those who first entered repayment at least 20 or 25 years ago, regardless of their repayment plan. 

In addition, borrowers who have experienced runaway interest accrual, and people who qualify for loan forgiveness under other programs but haven’t applied, could all benefit, as well. Many borrowers covered by the SAVE plan forbearance could qualify for automatic relief under this new program, if it actually gets implemented. 

In addition, the upcoming national elections could determine the fate of the SAVE plan and associated loan forgiveness. If Kamala Harris wins the election, she would likely opt to extend the administrative forbearance for SAVE borrowers; and if the program is struck down by the courts, her administration could try to draft new regulations for a replacement IDR plan. 

If Democrats win control of both the House and Senate as well as the White House, they could try to pass legislation codifying SAVE into law, effectively making the current legal challenges moot. 

On the other hand, if former President Trump returns to the White House, his administration would likely take steps to eliminate SAVE if the courts have not already done so.

Ultimately, borrowers have a lot to consider as the student loan system goes through a period of remarkable upheaval and uncertainty.