News

getty The Eighth Circuit Court of Appeals has issued an injunction fully blocking the SAVE plan, the Biden administration’s attempt to slash student loan payments and forgive hundreds of billions of dollars’ worth of debt. The order marks another step towards the likely demise of the SAVE plan, as courts take a more skeptical view of the president’s power to drastically raise the costs of the student loan program without Congressional assent.

But the new injunction comes with an extra twist that could upend student loan repayment more broadly. While advocates of fiscal responsibility should cheer the probable end of the SAVE plan, the courts are setting up a difficult situation that Congress may need to resolve.

“The Secretary has gone well beyond this authority” The federal government offers several income-driven repayment (IDR) plans that allow borrowers to make payments that fluctuate with their income. Former President Biden created a new IDR plan, the SAVE plan, with extraordinarily generous terms. More than half of SAVE borrowers qualified for a $0 monthly payment, and many others did not cover their monthly accrued interest. SAVE therefore offered forgiveness of remaining outstanding balances after a period varying from 10 to 25 years—a feature most SAVE borrowers were likely to avail themselves of.

After the Supreme Court struck down an earlier Biden loan-cancellation scheme, a coalition of states challenged the SAVE plan as an overextension of executive power. The high court held in Biden v. Nebraska, the original student loan case, that policies of vast economic importance such as mass student loan cancellation must have “clear congressional authorization.” Though Congress has empowered the Secretary of Education to offer IDR plans, the states argued SAVE went well beyond what lawmakers intended.

The Higher Education Act allows the Secretary of Education to offer an “income contingent repayment [ICR]

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The statute giving the Secretary this authority, known as the ICR statute, is admittedly ambiguous. It sets a maximum repayment term of 25 years, but no minimum, and does not specify how to determine monthly payments. Crucially, the statute does not specify what should happen to unpaid balances at the end of that 25-year repayment term. Officials have usually understood it to allow forgiveness of unpaid balances at the end of the repayment term (which education scholar Jason Delisle argues was also the understanding of Congress when it wrote the ICR statute). Nevertheless, the law does not explicitly authorize forgiveness.

That omission mattered to the Eighth Circuit. Because the ICR statute does not explicitly call for forgiveness, the court’s injunction states that forgiving debts under the ICR authority is not permitted. “The Secretary has gone well beyond this authority by designing a plan where loans are largely forgiven rather than repaid,” the injunction reads.

The upshot is that loan forgiveness under any IDR plan relying on the ICR authority, not just SAVE, is illegal. While the court enjoined the SAVE plan in full, it implied that the Obama administration’s ICR-based plans, which also offer loan forgiveness after a certain period, might also be vulnerable to legal challenge.

Uncertainty for more than ten million borrowers in ICR-based plans The courts have not yet issued a final ruling on SAVE (this week’s action is merely an injunction), so the legal situation could still change. However, the Eighth Circuit did find that “the states are likely to succeed in their claim that the Secretary’s authority to promulgate ICR plans does not authorize loan forgiveness at the end of the payment period.” If this stands, the implications for the student loan repayment system are potentially quite disruptive.

As of September 2024 (the latest data available), 8 million borrowers were enrolled in the SAVE plan. Another 2.6 million were enrolled in other IDR plans based on the ICR authority. That makes more than 10 million borrowers total in ICR-based plans, or around a third of borrowers who have chosen a repayment plan. Even before SAVE came on the scene, more than 5 million borrowers were enrolled in ICR-based plans.

Preston Cooper/Forbes The ICR-based plans set payments too low for many borrowers to fully pay off their loans within the repayment period. Even before SAVE, the Congressional Budget Office figured that taxpayers were slated to forgive hundreds of billions of dollars through already-extant IDR plans. If loan forgiveness for ICR-based plans is illegal, it could upend these plans’ internal logic.

The Eighth Circuit suggested that the Secretary of Education could vary the share of income that ICR borrowers contribute to their loans on an individualized, year-to-year basis. If the Secretary updated this assessment rate on an annual basis to account for borrowers’ past rates of repayment, she could theoretically ensure that all ICR borrowers fully repay their loans within 25 years. But this system would be prohibitively complicated to administer, and it would likely cause a major, unanticipated spike in monthly payments.

To complicate matters, Congress also authorized another income-driven plan—known as income-based repayment (IBR)—where the statute does explicitly authorize forgiveness of unpaid balances after 20 or 25 years. (Indeed, the Eighth Circuit cited this fact as evidence that forgiveness was not Congress’ intent for ICR.) It’s possible that borrowers in ICR-based plans could switch to IBR and have their payments in ICR-based plans count toward the forgiveness timeline for IBR, which is also explicitly allowed in statute.

IBR plans have become less popular, though, since the benefits they offer are usually less generous than the ICR-based plans, even before SAVE. It would require considerable administrative effort to re-enroll all ICR borrowers in IBR, at a time when the Education Department and loan servicers are already facing the challenge of restarting student loan repayment after the pandemic-era pause. Moreover, older ICR-based borrowers—those who took out loans before 2014—would see a 50% spike in monthly payments relative to PAYE or REPAYE and a lengthening of repayment timelines, given the differential terms of IBR for older borrowers. Sticker shock for many borrowers seems inevitable, no matter the solution.

If you’re having trouble keeping IBR, ICR, and IDR straight, rest assured that you are not alone. This unholy morass of statutes, regulations, and court rulings creates confusion and uncertainty for tens of millions of student borrowers. It’s the direct result of Congress writing unclear laws and successive administrations one-upping each other with more and more generous loan repayment plans. Now, courts are starting to look into the mess and pulling out some of the Jenga blocks on which the system totters.

Congress must do its job If the Education Department and the court system must work out a solution on their own, the only winners will be the gods of chaos. Ultimately, Congress must act to fix the system once and for all. One potential solution might run as follows.

The older ICR-based plans created under Obama (PAYE and REPAYE) have been in effect long enough that borrowers have made financial decisions on the expectation that these plans would be available. Whatever the flaws of PAYE and REPAYE, those borrowers should have certainty going forward. Congress could pass a law allowing current borrowers to repay their loans based on IDR plans that existed in March 2020, before the payment pause. This would rightly kill the SAVE plan, but honor past promises to student borrowers.

For new borrowers, though, Congress could create a single new income-driven repayment plan with its terms set in law. That law should clearly spell out assessment rates, exemptions, repayment timelines, and whether or not loan forgiveness awaits at the end of the repayment period. Lawmakers also need to decide whether they want the new IDR plan to make money for the federal government, lose money, or be roughly budget-neutral. Then they should adjust the plan’s terms accordingly. The law should give the Secretary of Education no power to modify these terms or create new repayment plans.

The emerging consensus of federal courts holds that “major questions” of economic significance belong to Congress alone. How borrowers ought to repay over $1.6 trillion in student debts owed to taxpayers certainly qualifies as a question for Congress to answer. The current student loan repayment chaos is frustrating. The upside is that it may force lawmakers to finally do their jobs.