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6 Critical Updates on the Chaos Surrounding Student Loan Forgiveness and Repayment

It is a challenging time to be a student loan borrower. Millions of Americans are contending with simultaneous major disruptions to key federal student loan forgiveness and repayment programs, and the landscape seems to change by the day. The already complex and problematic student loan system was already uncertain, but the situation is off the charts.

While the current environment is subject to change, it's crucial for borrowers to stay informed about the latest developments. Here are six significant updates that every student loan borrower should be aware of.

Last week, a federal court in Kansas blocked elements of the Saving on a Valuable Education (SAVE) plan in response to a legal challenge brought by a group of Republican-led states. 

These states argued that the Biden administration overstepped its authority by establishing a new income-driven repayment (IDR) plan with generous terms. The states claim that SAVE is essentially illegal and goes beyond the powers granted to the administration by Congress.

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Preliminary injunction granted, but most of SAVE remains intact

The federal district court judge in Kansas allowed most of SAVE to remain in effect temporarily but granted a preliminary injunction that blocked the lower payments scheduled to begin in July. The injunction also halted other SAVE features not yet fully implemented, such as automated annual income recertification. 

Under SAVE, borrowers with only undergraduate student loans could have seen a 50% reduction in payments, while those with a mix of graduate and undergraduate school loans would experience a smaller decrease.

Education Department warns of potential student loan system disruption

When the injunction was issued, the Education Department's loan servicers had already begun recalculating borrowers' payments under SAVE. Officials warned that stopping those recalculations and then having to recalculate borrowers’ student loan payments again to comply with the injunction would cause a massive disruption to the student loan system.

Appeals court stays injunction, allowing lower payments to proceed

On the basis of extreme disruption, following an appeal by the Biden administration, the 10th Circuit Court of Appeals stayed — or halted — the lower court’s injunction. As a result, the reduced payments under SAVE, initially set to take effect in July, will now move forward. 

However, the litigation is far from over. These are merely preliminary orders while the legal battle over SAVE continues.   

Education Department to lift administrative forbearance for millions of borrowers by August

In response to the Kansas court’s initial injunction blocking elements of SAVE, the Education Department placed around three million borrowers into an administrative forbearance, temporarily suspending their payments as legal challenges to the program continued. However, following the 10th Circuit’s ruling that stayed the injunction, the department is now free to implement the lower SAVE payments, making a longer-term forbearance unnecessary.

Borrowers whose SAVE payments have already been recalculated under the new formula should be able to start making those reduced payments this month. Others who are currently in an administrative forbearance should be able to resume repayment by August, according to department officials. 

Student loan forgiveness under SAVE remains blocked

The Kansas legal challenge is just one of the lawsuits targeting the SAVE plan. A different group of Republican-led states filed a second lawsuit in a different federal court in Missouri. And in response to that lawsuit, a federal judge issued an entirely distinct injunction.

Unlike the Kansas judge, the Missouri judge allowed most elements of SAVE to go into effect, including the lower payments set to begin in July. However, the Missouri judge issued an injunction blocking student loan forgiveness under the program, questioning whether the Higher Education Act authorized such relief.

Injunction's broad language raises concerns for borrowers

The Education Department is expected to appeal this injunction to the 8th Circuit Court of Appeals. 

First, however, the Biden administration is requesting clarification from the Missouri judge on the scope of the injunction. Officials argue that the injunction only pertains to early student loan forgiveness, a unique feature of SAVE that allows borrowers to qualify for a discharge in as little as 10 years (rather than the usual 20 or 25 years) if they borrowed small amounts of debt

However, the language in the court's ruling is broad, suggesting that any student loan forgiveness under SAVE could now be blocked, potentially jeopardizing relief for a much broader group of borrowers. 

IDR and Direct consolidation applications will go back up, say officials

The Education Department had taken down the online applications for IDR plans and Direct consolidation loans in response to the Kansas and Missouri injunctions. The online applications would need to have been revamped in order to comply with the court orders, which would have taken several weeks or longer. In the meantime, the department instructed borrowers to submit paper applications if necessary.

However, following the 10th Circuit’s decision to stay the Kansas injunction, the department indicated that it will work on restoring online access to the IDR and Direct consolidation applications. As of this writing, the online applications are still not accessible. 

IDR loan forgiveness deadline for Direct loan consolidation has expired

A key deadline associated with the IDR account adjustment, a temporary Biden administration program providing retroactive IDR loan forgiveness credit, has now passed. Borrowers who needed to consolidate their loans through the Direct loan program to qualify for the adjustment, such as those with commercially-held FFEL loans, must have applied by June 30. That window has now closed.

Consolidation rules revert to “normal” with uncertain future under SAVE plan

The expiration of the IDR account adjustment deadline has made the consolidation landscape much murkier as “normal” rules go back into effect. 

Related: Guide to Student Loan Weighted Average Consolidation Rules for Student Loans Starting July 2024

Previously, consolidating loans with pre-existing IDR credit would erase that credit, starting borrowers over at zero on their 20 or 25-year term. 

Under the new SAVE plan, borrowers who consolidate loans with existing IDR credit can receive the weighted average of IDR credit based on the loans being consolidated. But with SAVE facing legal challenges and its future highly uncertain, borrowers should be cautious about consolidating if they have significant IDR credit on their existing loans.

PSLF regulations offer weighted average credit for consolidated loans

Separately, Public Service Loan Forgiveness (PSLF) regulations that went into effect in July 2023 allow new Direct consolidation loans that contain loans with pre-existing PSLF credit to receive the weighted average of the PSLF credit. 

But this is less generous than under the IDR account adjustment, which allows borrowers to receive the highest amount of PSLF credit based on the underlying loan with the longest repayment history being consolidated. To receive these enhanced benefits, borrowers would have had to apply for consolidation by June 30, 2024.

PSLF servicing transition is not yet complete, no loan forgiveness is happening for now

Meanwhile, millions of borrowers have lost access to their PSLF data, including qualifying payment counts, as the Education Department transitions PSLF servicing from MOHELA to StudentAid.gov. 

During the transition period, borrowers can submit PSLF Employment Certification forms, but no forms will be processed — and no student loan forgiveness under PSFL approved — until the transition is complete. 

According to Education Department guidance, the transition is expected to be completed sometime in July. At that point, borrowers will be able to see their PSLF data through a new dashboard at StudentAid.gov, and processing of PSLF forms will resume. However, the department has not provided a firm date, leaving PSLF effectively suspended at this time.

Separately, MOHELA is also transitioning borrowers to a new internal servicing platform, requiring people to set up new login credentials through a redesigned MOHELA website. On top of that, another million or so borrowers are being transferred from MOHELA to one of the Education Department’s other loan servicers — Aidvantage, Nelnet or EdFinancial. These transitions should continue through July, adding more confusion and complexity to an already tenuous situation.

Don't let the chaos of the student loan system hold you back

The current student loan landscape is fraught with uncertainty, legal challenges, and servicing transitions that have left millions of borrowers confused and frustrated. 

If you're feeling overwhelmed or unsure about how to manage your student loans in light of these changes, book a consultation with one of our student loan experts. They’ll review your options, develop a personalized repayment strategy, and create a clear path to achieve your financial goals. 

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