Federal Court Ruling Deals Major Blow to Student Loan Forgiveness Plans

Introduction: A Landmark Decision Impacting Millions of Borrowers

A recent decision by the 8th Circuit Court of Appeals has sent shockwaves through the student loan landscape, potentially undermining several popular federal student loan repayment plans that millions of borrowers have relied on to eventual loan forgiveness. The ruling stems from a legal challenge brought by Republican-led states against President Joe Biden’s SAVE plan, an income-driven repayment (IDR) option designed to make student loans more affordable. While the case is not yet finalized, the court’s decision has significant implications for borrowers, signaling that forgiveness under certain IDR plans may no longer be available. This summary breaks down the key takeaways and the potential fallout for borrowers.

The SAVE Plan and Its Likely Demise: What Borrowers Need to Know

The SAVE plan, introduced in 2023, was designed as the most affordable IDR option, offering lower payments and a generous interest subsidy to prevent ballooning balances. Unlike other IDR plans, it allowed for faster forgiveness for borrowers with smaller loan balances. However, the 8th Circuit Court of Appeals has ruled that the SAVE plan likely exceeds Congress’s intent when it authorized income-driven repayment plans decades ago. The court’s narrow interpretation of the law suggests that forgiveness under SAVE is unlikely to survive, leaving millions of borrowers facing higher monthly payments if forced to switch to other plans.

Forbearance and Forgiveness: What Borrowers Should Expect in the Short Term

Borrowers enrolled in the SAVE plan were placed in forbearance last August, following the court’s initial injunction. During this period, no payments are due, and interest does not accrue. However, time spent in forbearance does not count toward forgiveness—whether under IDR or Public Service Loan Forgiveness (PSLF). The Department of Education predicts this forbearance will likely continue through most of 2025, though this could change depending on further legal developments. Borrowers who want to continue progressing toward forgiveness can switch to other IDR plans, but they should be aware that these plans offer fewer benefits and may result in higher payments. Additionally, processing delays for new IDR applications are expected to be lengthy.

Beyond SAVE: The Broader Implications for IDR Plans Like ICR and PAYE

The court’s ruling goes beyond the SAVE plan, casting doubt on forgiveness under two other popular IDR plans: Income-Contingent Repayment (ICR) and Pay As You Earn (PAYE). These plans, like SAVE, were created under the same 1993 statutory authority. The court argues that while Congress allowed for income-driven payments, it did not explicitly authorize forgiveness after 20 or 25 years—a conclusion that upends decades of regulatory guidance and borrower expectations. This decision could force borrowers into more expensive repayment plans or require them to make balloon payments at the end of their repayment terms, undermining the purpose of IDR plans altogether.

A Silver Lining: IBR and PSLF Remain Intact—for Now

While the ruling deals a significant blow to SAVE, ICR, and PAYE, two other critical forgiveness programs remain unaffected: Income-Based Repayment (IBR) and Public Service Loan Forgiveness (PSLF). IBR, created by Congress in 2007, explicitly includes forgiveness at the end of its repayment term. PSLF, which forgives loans after 120 qualifying payments for borrowers in public service, also remains intact. Importantly, payments made under blocked plans like PAYE and SAVE can still count toward IBR and PSLF forgiveness, as long as borrowers switch to eligible plans. However, borrowers in SAVE forbearance will not make progress toward PSLF unless they actively switch repayment plans.

The Road Ahead: Potential Congressional Intervention and Borrower Next Steps

The court’s decision is not final, as the case has been sent back to a lower court for further proceedings. However, Congress may act before a final ruling, with proposals underway to repeal existing IDR plans and replace them with a single plan that eliminates forgiveness after 20 or 25 years. Current borrowers could be grandfathered into existing plans under this proposal, but nothing is certain yet. In the meantime, borrowers should stay informed about legal developments and consider their options carefully. Switching to IBR or PSLF may provide a path forward for those seeking forgiveness, but the landscape remains highly uncertain. For now, borrowers must navigate this challenging terrain with cautious optimism, hoping for a resolution that preserves the promise of student loan forgiveness.