A federal appeals court appears inclined to strike down President Joe Biden’s newest student debt relief initiative, which cuts payments for millions and offers a path to student loan forgiveness. And a potentially far-reaching ruling could also eliminate loan forgiveness under several much older repayment programs.

In August, the 8th Circuit Court of Appeals issued a nationwide injunction blocking Biden’s SAVE plan while a legal challenge brought by Republican-led states continues. SAVE is the newest Income Driven Repayment or IDR plan. Like all IDR plans, the program uses a formula to tie a borrower’s monthly student loan payments to their income and family size, with loan forgiveness at the end of the plan’s repayment term if the borrower doesn’t pay off the balance in full. But SAVE is more generous than many older IDR plans, offering borrowers even lower payments and faster student loan forgiveness, as well as an interest benefit that ends growing loan balances.

But at a critical hearing last week, a panel of 8th Circuit judges — all Republican appointees — consulted with Biden administration lawyers and appeared inclined to strike down the SAVE plan. An adverse court decision could have much wider implications for student loan forgiveness under other IDR plansalso.

Judges question student loan forgiveness and lower payments under SAVE plan

The gist of the arguments made by the Republican-led states is that the Biden administration overstepped its statutory authority by creating the SAVE plan and all of its features and benefits.

Congress authorized the creation of IDR plans through legislation passed more than three decades ago, but has provided few details about what the plans should look like (other than tying student loan payments to income, with a maximum repayment term of 25 year old). Congress directed the Department of Education to develop regulations to establish rules for these programs. The Department has done this four times over the past 30 years, creating what we now know as the Income-Based Repayment Plan, the Pay As You Earn Plan, the Revised Pay As You Earn Plan and the SAVE Plan (which replaced Revised Pay) . As you earn). These plans are often referred to by their acronyms—ICR, PAYE, REPAYE, and SAVE—and all governing regulations provide for student loan forgiveness, usually after 20 or 25 years of repayment. Congress passed separate legislation creating income-based repayment plans, or IBRs.

The states, led by Missouri, argue that Congress did not expressly authorize the many benefits of the SAVE plan. These include a generous income relief limit that allows lower-income borrowers to pay nothing, a significant interest subsidy, and student loan forgiveness as early as 20 or 25 years in certain cases.

But the states go further and also suggest that Congress never intended it to exist any student loan forgiveness at the end of an IDR repayment term (except IBR). The Biden administration responds that this argument flies in the face of the legislative history associated with the establishment of IDR plans and 30 years of regulations, policies, and guidance spanning multiple Democratic and Republican administrations.

Last Thursday, in a key court hearing, a panel of 8th Circuit judges appeared to accept the states’ arguments.

“If the borrower’s payments are reduced to zero and then forgiven, how is that a repayment plan?” U.S. Circuit Judge L. Steven Grasz asked lawyers for the Biden administration during the hearing. Judge Grasz was appointed by former President Donald Trump. Another judge on the panel characterized the SAVE plan as “a massive attempt to forgive loans.”

It would only take two judges of the three-judge panel to agree to overturn the SAVE plan.

Legal challenge to SAVE student loan forgiveness expected to reach Supreme Court

The current 8th Circuit order blocking the SAVE plan is intended as a somewhat temporary measure while the legal challenge to the program continues. But following last Thursday’s court hearing, it seems highly unlikely that the order will be lifted anytime soon. And the court could issue a more definitive ruling on the program — and on student loan forgiveness generally under other IDR plans derived from the same statutory authority — within months.

The 8th Circuit likely won’t have the final say on the future of student loan forgiveness and reduced payments under the SAVE plan. Whatever the ruling, it almost certainly will be appealed to the US Supreme Court. While the nation’s highest court may have a different interpretation of the program’s legality, challengers in particular relied on a 2023 Supreme Court decision striking down Biden’s first attempt at mass student loan forgiveness to argue that the SAVE plan should not be valid.

What borrowers should expect for student loan forgiveness and repayment in the coming months

Borrowers who were in the SAVE plan when the court order was issued in August were placed in forbearance. During the grace period, borrowers should not be billed and their balances will not increase due to interest. However, the grace period will not count toward student loan forgiveness under both IDR plans and public service loan forgiveness. At least eight million borrowers were affected.

The order also led to turmoil in the federal student loan system. The Department of Education had to remove online IDR and Direct Reinforcement applications to ensure compliance with the 8th Circuit order. And officials issued a system-wide processing pause for all IDR applications while they update the department’s internal systems. Recent graduates and borrowers who recently consolidated their federal student loans or took advantage of the Fresh Start program to get out of default could not apply for any As a result, the IDR plan, potentially putting them at risk of default if they can’t afford their standard plan payments. Additionally, borrowers who reached the 20- or 25-year threshold for student loan forgiveness under the ICR or PAYE plans could not obtain a discharge.

Last week, the Department of Education issued updated SAVE plan tolerance guidelines indicating that IDR processing should resume soon and some borrowers may be able to move to the IBR plan (although doing so may have some disadvantages). Officials expect the SAVE plan’s tolerance to last at least another six months.