ES: Federal Appeals Court Blocks SAVE Student Loan Repayment Plan

On August 9, 2024, the U.S. Court of Appeals for the 8th Circuit officially blocked the SAVE student loan repayment plan in its entirety, saying the injunction would remain in place "until further order of this court or the Supreme Court of the United States." The ruling replaced a temporary order issued by the same court in July. The result is that millions of borrowers who enrolled in the SAVE Plan to benefit from lower monthly payments and a potentially faster path to loan forgiveness will be in limbo as the legal process plays out.

Background

In August 2023, the Department of Education launched the most generous federal student loan income-driven repayment (IDR) plan to date called the Saving on a Valuable Education (SAVE) Plan. It replaced the Revised Pay As You Earn (REPAYE) Plan.

Like other IDR plans, SAVE calculates a borrower's monthly payment based on income and family size. At the time SAVE was implemented, the Supreme Court had just blocked federal student loan cancellation (under a different program) and student loan payments were set to resume in October 2023 for millions of borrowers after more than three years of payment pauses during the pandemic.
The SAVE Plan was structured to be implemented in phases, with some benefits taking effect immediately and others scheduled to go into effect in July 2024. Two key benefits that were scheduled to take effect in July 2024 were:

Key Benefits of the SAVE Plan

• Lower Monthly Loan Payments
• For undergraduate loans, monthly payments are capped at 5% of discretionary income, compared with 10% under REPAYE. Graduate loans remain capped at 10% of discretionary income. Borrowers with a mix of undergraduate and graduate loans pay a weighted average between 5% and 10%, based on the original principal balances of each loan type.
• Faster Path to Loan Forgiveness
• Borrowers with an original principal balance of $12,000 or less may qualify for loan forgiveness after 10 years of payments. For balances above $12,000, the repayment period increases by one additional year for every $1,000 borrowed.
• For example:
• $13,000 → forgiveness after 11 years
• $14,000 → forgiveness after 12 years
• Under the REPAYE plan, remaining balances were forgiven only after 20 years of payments, making SAVE significantly faster for many borrowers.

Legal Challenges to the SAVE Plan

After the SAVE Plan was introduced in 2023, it quickly became the subject of multiple legal challenges. In early 2024, several states joined one of two lawsuits arguing that the Department of Education had exceeded its authority and that the plan should have required approval from Congress.

In June 2024, two separate federal courts in Kansas and Missouri temporarily blocked key provisions of the SAVE Plan—just days before many borrowers were scheduled to see their monthly payments reduced by as much as half, from 10% of discretionary income under REPAYE to 5% under SAVE. In response, the Department of Education placed all borrowers enrolled in SAVE into administrative forbearance, during which no payments were required and interest did not accrue.

Shortly thereafter, a federal appeals court lifted the Kansas court’s injunction, allowing the specific SAVE provision that capped undergraduate loan payments at 5% of discretionary income to proceed. However, on August 9, a separate federal appeals court in Missouri issued a broader ruling that blocked the SAVE Plan in its entirety.

The Department of Education has indicated it will continue to challenge the ruling, and the legal process remains ongoing. Importantly, the status of borrowers enrolled in SAVE did not materially change following the Missouri decision, as borrowers had already been placed in administrative forbearance.

What's next for borrowers?

The ongoing legal uncertainty surrounding SAVE has no doubt created confusion and fThis uncertainty has created frustration for millions of enrolled borrowers who are unsure when their loan status will be resolved. Whether borrowers will ultimately benefit from lower monthly payments and a faster path to loan forgiveness under the SAVE Plan remains uncertain as the legal process continues.

In the meantime, the Department of Education has provided the following guidance for borrowers currently enrolled in SAVE:

• No payments are required during forbearance, and interest will not accrue.
• Time spent in forbearance does not count toward Public Service Loan Forgiveness (PSLF) or income-driven repayment (IDR) plan forgiveness.
• Borrowers will remain in administrative forbearance until the legal situation changes or loan servicers are able to bill the correct monthly payment amount.
• Borrowers (or employers making payments on their behalf) may continue to make payments during forbearance. Any payments made will be applied to future amounts due after forbearance ends.
• Borrowers who prefer not to remain in administrative forbearance may contact their loan servicer to change repayment plans, though some alternative plans may also involve temporary forbearance.
• Borrowers should expect further communication from the Department of Education or their loan servicer regarding next steps.
• Borrowers can monitor updates by visiting the Federal Student Aid website.

One bright spot: The Department of Education has already forgiven $5.5 billion in federal student loan debt for approximately 414,000 borrowers. In addition, the 8th Circuit Court of Appeals has ruled that states cannot reverse loans that have already been forgiven, ensuring that these borrowers will not be affected by ongoing legal challenges.

IMPORTANT DISCLOSURES

To the extent this material addresses tax-related matters, it is not intended or written to be used—and may not be used—for the purpose of avoiding penalties that may be imposed under applicable law. Each taxpayer should seek advice from a qualified tax professional based on their individual circumstances.

These materials are provided for general informational and educational purposes only and are based on publicly available sources believed to be reliable. However, no representation or warranty is made regarding the accuracy or completeness of the information. The content is subject to change at any time without notice.

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