Impact of Supreme Court’s Student Loan Relief Ruling on Borrowers

When President Joe Biden introduced his administration’s new student debt repayment plan, he touted it as “the most affordable student loan plan ever.” However, the plan now faces significant challenges that may hinder its implementation.

On Wednesday, the Supreme Court opted not to reinstate the program known as the Saving on a Valuable Education (SAVE) plan, as legal disputes regarding its validity continue.

The SAVE plan was designed to address persistent issues with previous income-driven repayment (IDR) plans. It was initiated shortly after the Supreme Court blocked Biden’s proposal to eliminate up to $20,000 in debt for eligible borrowers. With features that could reduce monthly loan payments to as low as $0 for some low-income individuals, SAVE quickly gained traction, garnering 8 million enrollees.

According to Jaret Seiberg, an analyst at TD Cowen, the SAVE plan emerged as a creative solution by the Biden administration in response to an earlier Supreme Court ruling that rejected its efforts to cancel student debt on the grounds of the COVID-19 emergency. However, this innovative approach has also made SAVE susceptible to legal challenges.

Currently, the SAVE plan is stalled due to a comprehensive injunction imposed by the U.S. Court of Appeals for the 8th Circuit last month. This ruling prevented the Biden administration from moving forward with elements of the plan that had not already been blocked by two lower court decisions.

In June, judges from Kansas and Missouri agreed with several Republican-led states that argued SAVE overstepped the Biden administration’s authority. The states contended that providing borrower relief before loans matured could harm lenders and loan servicers financially.

As a result, the Supreme Court has left the appeals court’s ruling intact, effectively putting the SAVE plan on hold.

For the 8 million individuals enrolled in SAVE, this means their loan payments have been suspended since the 8th Circuit’s ruling in July. The Supreme Court’s order upholding that ruling means those borrowers will remain in forbearance, according to officials from the Department of Education.

During this forbearance period, SAVE participants do not need to make monthly payments, and no interest will accrue on their loans. However, the time spent in forbearance does not contribute towards qualifying for Public Service Loan Forgiveness (PSLF) or IDR loan forgiveness.

Typically, borrowers in these programs can qualify for forgiveness after a specified number of years of repayment; for example, PSLF enrollees become eligible after ten years. However, since forbearance does not count toward those repayment periods, it may ultimately extend the time before borrowers earn forgiveness.

Education Secretary Miguel Cardona stated in an interview that the Biden administration is actively contesting the court rulings. He emphasized the administration’s commitment to supporting borrowers, asserting, “Student debt shouldn’t be a life sentence.”

The Supreme Court has indicated that it anticipates the 8th Circuit will provide a more detailed decision regarding the SAVE case soon. This could lead to an appeal to the Supreme Court later this year. However, a final ruling from the high court may not be expected until 2025.

The upcoming presidential election could also influence the fate of the SAVE plan. If Democratic candidate Kamala Harris wins, the Education Department is likely to persist in defending the SAVE program in court. Additionally, her administration might devise a new repayment program that could better withstand legal scrutiny.

Conversely, if Republican candidate Donald Trump secures victory in the election, it is likely that his administration would abandon legal efforts to uphold SAVE, allowing existing court orders that block the program to prevail. In such a scenario, forbearance for the 8 million enrollees would likely cease.

For the time being, it appears forbearance is expected to remain in effect at least until the inauguration. Seiberg notes that a win by Harris would likely extend this status even longer.