When President Biden announced his plan to provide student debt relief for 43 million borrowers nearly two years ago, there was a piece to his program that attracted less attention: a new student loan repayment program that would cut monthly payments in half for millions.
The repayment program, called SAVE, was meant to become a permanent fixture of the federal student loan system, offering a more affordable path to repayment, particularly for lower-income borrowers. But two groups of Republican-led states have filed separate lawsuits to block the SAVE program — including many of the states that challenged Mr. Biden’s $400 billion debt cancellation plan, which was struck down by the Supreme Court last year.
Missouri, along with six other states, filed suit on Tuesday in the U.S. District Court for the Eastern District of Missouri, seeking to upend the program. That follows a challenge filed by 11 other states, led by Kansas, in late March. Both suits argue that the administration has again exceeded its authority, and the repayment plan is just another backhanded attempt to wipe debts clean.
“Yet again, the president is unilaterally trying to impose an extraordinarily expensive and controversial policy that he could not get through Congress,” the plaintiffs said in the complaint filed in Missouri.
The latest legal challenge landed just a day after the Biden administration renewed its efforts to offer more extensive debt relief in an attempt to make good on a campaign promise during an election year. That effort, which joins existing programs offering targeted relief, is also expected to be challenged.
The SAVE plan, which opened to borrowers in August and has more than eight million enrollees, isn’t a novel idea: It’s an income-driven repayment program based on a roughly 30-year-old design that ties borrowers’ monthly payments to their income and household size. But SAVE has more generous terms than previous plans. Already, 360,000 enrollees have received approval to have the remainder of their debts canceled, totaling $4.8 billion, after having made payments for 10 to 19 years.
Blocking the plan could throw millions of borrowers’ financial lives into disarray and create headaches for loan servicers. Several legal experts said they felt that the program was on firmer legal ground than the plan blocked by the Supreme Court. That program was based on emergency powers derived through the HEROES Act, which President Donald J. Trump invoked to pause student loan payments at the start of the pandemic in 2020.
The Education Department declined to comment on pending litigation. But it said Congress gave the department the authority to define the terms of income-driven repayment plans, which adjust payments to a borrower’s income, in 1993, and that the SAVE plan was the fourth time it had used that authority.
Still, law professors and consumer advocates concede that the legal landscape has shifted, leaving more questions about the plan’s fate.
Here’s what we know:
Income-driven repayment plans are roughly 30 years old. Why are groups suing now?
Anything related to student loan relief has become politically charged. Here, the states argue the SAVE plan is unlawful in large part because of its high projected costs, which they said should require approval by Congress.
The Congressional Budget Office estimated that SAVE would cost $261 billion over 10 years, but another analysis came up with a much larger number.
Economists for the Penn Wharton Budget Model, a research group at the University of Pennsylvania, projected it would cost $475 billion over the same period — with roughly $235 billion of that attributed to the increased generosity of SAVE relative to existing plans, according to Kent Smetters, a professor at Wharton and the faculty director of the Penn Wharton Budget Model.
The legal challenges “are all basically premised on the idea that if it’s expensive, it’s illegal,” said Persis Yu, deputy executive director at the Student Borrower Protection Center, an advocacy group. “That’s not really the law.”
How is this plan different from the ones that came before it?
SAVE’s terms are more favorable: It reduces payments on undergraduate loans to 5 percent of a borrower’s discretionary income, down from 10 percent in the plan it replaced, known as REPAYE. After monthly payments for a set number of years — usually 20 — any balance is forgiven. (Graduate school debtors still pay 10 percent over 25 years.)
The program shortens the repayment term for people who initially borrowed $12,000 or less to 10 years, at which point any remaining debt is canceled.
SAVE also tweaks the payment formula so more income is protected for a borrower’s basic needs, reducing payments overall. That means borrowers who earn less than 225 percent of the federal poverty guideline — equivalent to what a $15-an-hour worker earns annually, or $32,800 or less for a single person — have no monthly payment. Under REPAYE, less income was shielded, up to 150 percent of federal poverty guidelines.
About 4.5 million of the roughly eight million SAVE enrollees have no monthly payment, according to the White House.
The states seeking to block the program argue that this effectively makes more of the loans act like grants.
What will determine whether the cases move forward?
Before a court can get to the arguments of a case, the plaintiffs must establish that they have standing to sue — that is, they are suffering a concrete harm that can be remedied by the courts.
Some legal experts said that Missouri may have a better chance at passing this test — after all, it succeeded when the states challenged Mr. Biden’s broad debt relief program. Though a district court in that case initially found that the states did not have standing to sue, the decision was reversed by an appeals court and the plan was put on hold. Later, the Supreme Court held that Missouri had standing because it would have lost revenue from the Missouri Higher Education Loan Authority, or MOHELA (a federal loan servicer, which is considered an arm of that state), if the debt cancellation proceeded. That was enough to let the case move forward, and Missouri is making a somewhat similar argument here.
“That is a proven path to standing when the government promises to wipe away the debts of tens of millions of people — but it’s not clear that it will be successful here, since lower monthly payments are not the same as total debt relief,” said Mike Pierce, executive director of the Student Borrower Protection Center.
Besides arguing that Missouri would lose money unless borrowers stayed in debt longer, the suit also contends the plan would hurt the states’ ability to attract employees to government jobs because the Public Service Loan Forgiveness Plan — which allows public sector and nonprofit workers to have federal student debt balances forgiven, generally after 10 years of payments — will become less attractive when stacked alongside SAVE. (The suit doesn’t mention that SAVE is a qualifying repayment program that can be used as part of the Public Service Forgiveness Program, which often offers an even shorter path to forgiveness than SAVE.)
The states also claim in the lawsuit that forgiveness will deprive them of tax revenue — a federal law effective through 2025 exempts canceled student debt from taxation, and several states’ laws track federal taxation laws. But legal experts and advocates say the states could change their tax laws and collect the extra revenue.
Could SAVE be struck down?
If either of the recent cases moves forward, the states will get their chance to argue that the Education Department overstepped its authority — most likely, by turning to a legal principle known as the “major questions doctrine,” which has been increasingly invoked by conservative challengers seeking to curb the powers of the executive branch. The thrust of that doctrine is that Congress must speak clearly when it authorizes the executive branch and its agencies to take on matters of political or economic significance. In the past, courts would typically defer to agency interpretations of ambiguous statutes.
“The major questions doctrine has put a major crimp on the executive branch’s ability to innovate on longstanding programs and longstanding statutes,” said Stephen Vladeck, a professor at the University of Texas School of Law. “Five years ago, the question we would have asked is if the interpretation was reasonable. Now, the question is, ‘Is their authority clear?’ And that is a difficult — if not impossible — standard for agencies to meet, especially for statutes Congress enacted years, if not decades, before the major questions doctrine was a thing.”
“It’s going to be hard for anyone to be confident,” he added, “that the new plan is safe just because the legal arguments in support of it are strong.”
In 1993, Congress amended the Higher Education Act of 1965 and enabled Education Department to modify its income-contingent repayment plan, which was created to provide financial relief to borrowers at risk of falling behind on payments. Since then, the department has relied on that authority to create two other income-driven programs, including Pay As You Earn (PAYE) in 2012 and the Revised Pay As You Earn (REPAYE) in 2015, both of which incrementally improved on the plans before them.
“This statutory authority is not just a theoretical argument,” explained Mark Kantrowitz, a financial aid expert, who also said he considered the legal challenges too weak to succeed.
Could the SAVE plan be suspended while a potential case is decided?
The group of states led by Kansas have filed for a preliminary injunction, with the hope that the courts will temporarily block the entire SAVE program while the case is decided. But that probably won’t happen, at least not in a way that would upset the stability of the student loan repayment system. The states would have to show their case is likely to succeed, and the courts would have to weigh the harm to borrowers against the harm claimed by the states.
“While they seem to be asking the court to block implementation of all aspects of the SAVE plan, their biggest focus is on blocking the Department of Education from canceling debt under the plan, arguing that’s what will irreparably harm states while the litigation is pending because, as they put it, once the debt is canceled, that egg can’t be unscrambled,” said Abby Shafroth, co-director of advocacy at the National Consumer Law Center.
Should borrowers enrolled in SAVE — or considering enrolling — do anything differently now?
Borrower advocates suggest focusing on what you can control — continue to enroll in the repayment plan that makes most sense for your financial situation.
But keep in mind that the Biden administration plans to phase out some income-driven repayment plans on July 1, when all of SAVE’s benefits take full effect. New borrowers won’t be able to enroll in the PAYE plan or the income-contingent plan (I.C.R.) after July 1, though borrowers with parent PLUS loans will remain eligible — after they are consolidated. The REPAYE plan has already been replaced by SAVE.
The so-called income-based repayment plan, known as I.B.R., will remain open, though its terms are generally not as favorable as the SAVE program.