When President Biden announced his plan to provide student loan relief to 43 million borrowers nearly two years ago, there was one part of his program that didn't get much attention. It's a new student loan repayment program that will cut monthly payments in half for millions of people.
The repayment program, called SAVE, was intended to be a permanent fixture in the federal student loan system and provide a more affordable means of repayment, especially for low-income individuals. But two groups of Republican-led states have filed separate lawsuits seeking to block the SAVE program, including one challenging Biden's $400 billion debt cancellation plan that was struck down by the Supreme Court last year. This includes many states that have filed suit.
Missouri, along with six other states, filed a lawsuit Tuesday in the U.S. District Court for the Eastern District of Missouri seeking to overturn the plan. This follows a challenge filed in late March by 11 other states, led by Kansas. Both lawsuits allege that the government has once again exceeded its authority and that the repayment plan is nothing more than a cover-up to wipe out the debt altogether.
“Once again, the president is attempting to unilaterally impose extremely expensive and controversial policies that were not passed by Congress,” the plaintiffs wrote in their complaint filed in Missouri.
The latest legal challenge was filed a day after the Biden administration renewed its efforts to provide broader debt relief to fulfill an election-year campaign promise. The effort, which joins existing programs to provide targeted relief, is also expected to be challenged.
The SAVE plan, which opened to borrowers in August and has more than 8 million people enrolled, is not a new idea. It's an income-driven repayment program based on a nearly 30-year-old design that ties a borrower's monthly payments to the amount they owe. Income and household size. However, the terms of SAVE are more generous than previous plans. Already, 360,000 registrants have received approval to cancel their remaining debt, totaling $4.8 billion, after making payments over 10 to 19 years.
If the plan is blocked, it could disrupt the financial lives of millions of borrowers and cause headaches for debt collectors. Several legal experts said they feel the plan is on stronger legal footing than the plan blocked by the Supreme Court. The program was based on emergency powers obtained through the HEROES Act, which President Donald J. Trump invoked at the start of the 2020 pandemic to suspend student loan payments.
The Department of Education declined to comment on pending litigation. But Congress gave the department authority in 1993 to set the terms of income-driven repayment plans that adjust payments based on a borrower's income, and the SAVE plan marks the fourth time the department has used that authority. said.
Still, law professors and consumer advocates acknowledge that the legal landscape has changed and more questions remain about the plan's fate.
Here's what we know:
Income-based repayment plans have been around for about 30 years. Why are organizations filing lawsuits now?
Anything related to student loan relief is politically charged. Here, the states argue that the SAVE plan is illegal, primarily because of its expected high costs, and that it must be approved by Congress.
The Congressional Budget Office estimated that SAVE would cost $261 billion over 10 years, but other analyzes come up with even higher numbers.
Economists at the Penn Wharton Budget Modeling research group at the University of Pennsylvania project that it will cost $475 billion over the same period, including about $235 billion. Kent Smetters, a Wharton professor and dean of the Penn Wharton Budget Model, said this is due to SAVE's increased generosity compared to existing plans.
The legal challenges “are all fundamentally premised on the idea that if it's high, it's illegal,” said Persis Yu, deputy executive director of the Student Borrower Protection Center, an advocacy group. “That's not actually a law.”
How is this plan different from previous plans?
SAVE's terms are more favorable, reducing undergraduate loan payments to 5% of a borrower's discretionary income, down from 10% in the alternative plan known as REPAYE. After a certain number of years of monthly payments (usually 20 years for him), any remaining balance is forgiven. (The graduate debtor still pays 10% over 25 years.)
The program reduces the repayment period to 10 years for those who first borrow $12,000 or less, at which point all remaining debt will be canceled.
SAVE also adjusts payment formulas to protect more income for borrowers' basic needs and reduce overall payments. That means borrowers who earn less than 225 percent of the federal poverty guidelines (equivalent to the annual income of a $15-an-hour worker, or $32,800 or less for a single person) will have no monthly payments. Under REPAYE, lower incomes were protected up to 150 percent of the federal poverty guidelines.
According to the White House, about 4.5 million of the approximately 8 million SAVE registrants have zero monthly payments.
States seeking to block the program argue that it effectively causes more loans to act like grants.
What determines whether a case moves forward?
Before a court can argue a case, a plaintiff must establish that he or she has standing to sue, that is, that he or she has suffered tangible harm that the court can remedy.
Some legal experts said Missouri may have a good chance of passing this test. As it turns out, the test passed when states challenged Biden's massive debt relief program. The district court in the case initially ruled that the states lacked standing to sue, but an appeals court reversed that decision and put the plan on hold. The Supreme Court subsequently ruled in favor of Missouri because it would lose revenue from the Missouri Higher Education Loan Authority, or MOHELA, a federal loan servicer considered a division of Missouri. It was decided that there was. That was enough to move the case forward, but Missouri is making a somewhat similar argument here.
“This is a proven path to standing up when governments make promises to cancel debt for tens of millions of people. But reducing monthly payments is not the same as complete debt forgiveness. So it's not clear whether it will be successful here,” he said. Mike Pearce, executive director of the Student Borrower Protection Center, said:
The lawsuit alleges that the state of Missouri will lose money if borrowers do not stay in debt longer and that the plan is called the Public Service Loan Forgiveness Program, which provides federal loan forgiveness to public sector and nonprofit employees. They argue that this harms states' ability to attract employees to government jobs. Student loan balances are typically forgiven after 10 years of payments, but this becomes less attractive when combined with SAVE. (The lawsuit does not mention that SAVE is a qualified repayment program that can be used as part of the Public Service Forgiveness Program, which often provides a shorter path to forgiveness than SAVE. .)
The states also argue in their lawsuits that the exemption would deprive them of tax revenue. Federal law, in effect through 2025, exempts canceled student loans from taxation, and several state laws are following federal tax law. But legal experts and advocates say states could change their tax laws to collect additional revenue.
Can I disable SAVE?
If any of the recent lawsuits move forward, states will have an opportunity to argue that the Department of Education has overstepped its authority — perhaps in a way that conservatives have increasingly invoked to ask “key questions.” We will turn to legal principles known as 'principles'. Challengers who seek to curb the power of the executive branch. The gist of this principle is that Congress must be clear in authorizing the executive branch and its agencies to take on issues of political or economic importance. Until now, courts have generally relied on authorities' interpretations of ambiguous statutes.
“The principal question doctrine places significant constraints on the executive branch's ability to innovate on long-standing programs and long-standing statutes,” said Stephen Vladeck, a professor at the University of Texas School of Law. “Five years ago, the question we would have asked was whether the interpretation was reasonable. Now the question is: Is their authority clear?” And this is a standard that is difficult, if not impossible, for agencies to meet, especially when the Key Questions Act was enacted years or even decades before it was enacted. The same applies to laws enacted by Congress. ”
He added: “It would be difficult for anyone to be convinced that a new plan is safe just because the legal basis supporting it is strong.”
In 1993, Congress amended the Higher Education Act of 1965 to allow the Department of Education to make amendments. Income-based repayment plans were created to provide financial relief to borrowers who are at risk of defaulting on their payments. Since then, the department has used its authority to create two other income-driven programs, including Pay As You Earn (PAYE) in 2012 and Revised Pay As You Earn (REPAYE) in 2015. . Both improved their plans incrementally. In front of them.
“This statutory authority is not just a theoretical argument,” explained financial aid expert Mark Kantrowitz, who also said he believes the legal challenge is too weak to succeed.
Could the SAVE plan be suspended pending the determination of potential litigation?
A group of states led by Kansas filed for a preliminary injunction, hoping the court would temporarily block the entire SAVE program until the lawsuit is decided. But it probably won't happen, at least not in a way that would shake up the stability of the student loan repayment system. Each state would have to show that the case is likely to succeed, and the court would have to weigh the harm each state claims against the harm to the borrower.
“Although they appear to be asking the courts to block implementation of all aspects of the SAVE plan, their primary focus is to prevent the Department of Education from canceling debt under the plan, and if the state “As they say, once a debt is canceled, the egg cannot be unscrambled,'' according to the National Consumer Law Center. said Abby Shafroth, co-director of advocacy.
Should borrowers enrolled in SAVE, or considering enrolling, do anything different now?
Borrower advocates suggest focusing on what you can control and continuing to enroll in the repayment plan that makes the most sense for your financial situation.
However, keep in mind that the Biden administration plans to phase out some income-driven repayment plans on July 1, when all SAVE benefits become fully effective. From July 1, new borrowers will no longer be able to enroll in PAYE plans or income-linked plans (ICRs), but borrowers with parent PLUS loans will continue to be eligible after the consolidation. The REPAYE plan has already been replaced by the SAVE plan.
So-called income-based repayment plans, known as IBR, will continue, but their terms are generally not as favorable as the SAVE program.