Good News on Student Loan Forgiveness, Biden’s SAVE Plan Is Paused by Courts

While the Biden administration has at least nine plans to forgive student loans, some are much bigger than others. And the two biggest have now run into legal buzzsaws. The Supreme Court (SCOTUS) eventually threw out its first plan in 2022. The second plan introduced a new income-driven repayment plan called SAVE, which, in practice, would forgive massive amounts of debt by dramatically reducing the amount students must repay and shortening the length of time they must repay. The Eighth Circuit Court of Appeals is preventing the Department of Education (ED) from implementing the plan until its legality can be evaluated. This ruling is being appealed to the SCOTUS, and they may take it up because the Tenth Circuit Court ruled the other way, allowing the plan to go into effect.

There are several noteworthy things about this.

1. SAVE’s legal troubles were mostly unexpected.

Of the biggest student loan forgiveness plans, the SAVE plan was on the soundest legal ground, as the relevant law didn’t place many restrictions on the repayment provisions that the ED Secretary could introduce when designing an income-driven repayment plan. For example, the law stated that the Secretary couldn’t require repayment for more than 25 years but was silent on a minimum number of years, so the SAVE plans sought to collect payments for as few as 10 years for many borrowers. Due to the absence of guardrails in the legislative language, most analysts thought SAVE was on safe legal ground. Yet two district courts and now a circuit court have cast considerable doubt on whether the policy is legal.

2. The Biden administration shot themselves in the foot.

The reason that SAVE’s legal foundation is now so shaky is directly due to the Biden administration’s overreach on their first plan to forgive loans. Its first plan hoped to escape legal scrutiny by arguing that no one had the standing to sue and that even if someone did, the vague wording of the law allowed the plan. But the SCOTUS ruled against them on both counts. First, the state of Missouri had standing due to a quasi-public student loan servicing entity, and a policy with such major political or economic implications required explicit Congressional authorization, not just vague language that could be read to authorize vast new powers. By losing so spectacularly, the Biden administration not only lost on their first plan, but they shot themselves in the foot for all the others, too, since those plans are now being evaluated with the presumption the Missouri—and similar states—have standing to sue, and that student loan forgiveness of a sufficient scale will be subject to the major questions doctrine. For example, the Eighth Circuit’s order pausing save noted that “The new SAVE plan, by contrast, is an order of magnitude broader than anything that has come before” a clear indication that the major questions doctrine should be applied as the cases proceed.

3. The Biden administration is likely to ignore the Eighth Circuit’s order.a

The Eighth Circuit’s ruling came after an earlier injunction from a district court. It found that

Despite the district court’s injunction, the Government continues to forgive loans for borrowers enrolled in SAVE. It does so through a new so-called ‘hybrid rule.’ The Government’s hybrid rule combines the parts of SAVE that the district court did not enjoin, such as the payment-threshold provisions and nonaccrual of interest, with the forgiveness-of-principal provisions in REPAYE … The Government’s hybrid plan was created after and in response to the district court’s preliminary injunction and has effectively rendered that injunction a nullity. As a result of the hybrid plan, the only practical effect of the district court’s injunction is that borrowers formerly enrolled under SAVE and now enrolled under the hybrid plan will not be eligible for loan forgiveness until they have been making payments for at least 20 years, as opposed to as early as 10 years.

Faced with an injunction from a district court, the Biden administration created a hybrid repayment plan that allowed them to keep forgiving as much debt as possible, showing that the ED can move quickly when it wants to. I’m skeptical that the Eighth Circuit’s ruling will be implemented as rapidly. The ED has already placed borrowers enrolled in SAVE into an administrative forbearance. If the administrative forbearance lasts longer than it took the ED to create the hybrid plan, we’ll know that the ED is trying to ignore the Circuit Court, just like it did the district court.

In addition, the Eighth Circuit ruled that the administration is “enjoined from any further forgiveness of principal or interest, from not charging borrowers accrued interest, and from further implementing SAVE’s payment-threshold provisions.” Yet the Biden administration has implemented regulations that waive interest for students in forbearance, and there is some indication that “no interest will accrue” for borrowers in the SAVE forbearance. In other words, the Eighth Circuit ordered the administration to charge interest, and the administration responded by not charging interest, a direct violation of the Eighth Circuit’s order.

If the administrative forbearance lasts longer than it took ED to create the hybrid repayment plan, and if interest is not charged, the Eighth Circuit should hold the administration accountable.

Image by Dtobias — The Byron White United States Courthouse in Denver, Colorado, used by the United States Postal Service and the United States Court of Appeals for the Tenth Circuit — Wikimedia Commons