In October 2024, a significant update emerged regarding student loan programs, particularly affecting the SAVE plan, an innovative Income-Driven Repayment (IDR) program introduced by the Biden administration in 2023. The U.S. Department of Education recently restored online access to the Income-Driven Repayment (IDR) applications and resumed processing them, providing borrowers who have been in limbo during a two-month nationwide injunction a potential option to pursue student loan forgiveness outside of the SAVE plan. This injunction, issued by the 8th Circuit Court of Appeals, has kept more than eight million borrowers in a forced forbearance since August, halting their payment obligations while a legal battle unfolds over the legality of the SAVE plan. The challenge, led by Republican state officials, argues that the plan exceeds the Biden administration’s authority. Conversely, advocates assert that it is well within the legal scope defined by the Higher Education Act.
The SAVE plan is specifically designed to lower monthly payments, prevent excessive interest accumulation, and ultimately lead to student loan forgiveness. During the forbearance period caused by the injunction, borrowers are not required to make any payments, nor will interest accrue on their loans. However, crucially, this time does not count towards the forgiveness timelines specified under the Public Service Loan Forgiveness (PSLF) program or other IDR plans. The current legal battle could prolong this forbearance until 2025, as any subsequent ruling is likely to face an appeal in the Supreme Court, leaving borrowers in a precarious position regarding their financial obligations and long-term planning for loan repayment.
With the IDR applications now back online, borrowers have the option of switching from the SAVE plan to the Income-Based Repayment (IBR) program, the only alternative available for most due to the phasing out of other older programs like Pay As You Earn (PAYE) and Income-Contingent Repayment (ICR). There are compelling reasons for borrowers to consider this switch. For those seeking PSLF, transitioning to IBR allows them to resume making qualifying payments toward loan forgiveness, especially if they are nearing their 120-payment goal. Similarly, for borrowers on an IDR forgiveness path after 20 or 25 years of payments, leaving the SAVE plan ensures that they continue accruing credit toward their forgiveness timeline. Additionally, IBR offers more certainty given the ongoing legal threats to the SAVE plan, which could potentially jeopardize student loan forgiveness across multiple IDR programs if the court sides with the challengers.
However, the decision to leave the SAVE plan for IBR is not without its drawbacks. One of the major considerations is the potential increase in monthly payments. While borrowers with very low incomes (below 150% of the federal poverty line) may see little change, those with higher incomes could face significantly higher payments upon switching to IBR. For example, an individual earning $75,000 might see their payments jump from about $345 under the SAVE plan to nearly $655 under IBR, creating an unforeseen financial burden. Furthermore, IBR does not offer the same generous interest subsidies as SAVE; borrowers who find themselves paying less than the accruing interest could see their balances grow rather than decline, compounding their debt over time.
Additionally, there are various alternative pathways available for those pursuing PSLF that may obviate the need to switch to IBR. Borrowers could remain in the SAVE forbearance and utilize new options such as the PSLF Buyback, which allows them to make lump-sum payments after completing 120 months of qualifying employment. Alternatively, they could switch to a standard 10-year repayment plan, which also counts towards PSLF without the need for income determination. Economic hardship deferments could also be used strategically to gain credit towards PSLF without incurring the risks associated with IBR.
The uncertainty surrounding the SAVE plan complicates decision-making. With ongoing legal challenges and the potential for new legislation or administrative shifts following the upcoming national elections, it is difficult to predict the future conditions for borrowers. While switching to IBR may seem like a prudent move for some, it could yield unintended consequences, especially if the SAVE plan is upheld and borrowers involuntarily shift plans during a crucial juncture. They could face significant financial implications, such as higher payments and capitalization of interest, if they switch only to find the SAVE plan reinstated later.
In summary, while the restoration of the IDR application process gives borrowers a new option to escape the SAVE plan’s uncertainty, the decision to switch to IBR is multifaceted and requires careful consideration. For some, particularly those nearing forgiveness eligibility under the PSLF, switching to IBR may allow them to regain lost progress. However, others may find staying in the SAVE plan more beneficial given potential payment increases and ongoing legal battles. Ultimately, each borrower will need to weigh their individual circumstances and the evolving landscape of student loan policies to determine the best course of action.
