The U.S. Education Department is updating its systems to comply with a court order that halts the counting of forbearances toward student loan forgiveness, according to Deputy Press Secretary Ellen Keast. Borrowers who make payments after becoming eligible for forgiveness will receive refunds once discharges resume. Keast did not provide a timeline for the resumption of discharges or specify when the pause began.
Several student loan servicers, companies responsible for collecting loan payments, have stated they have not yet received guidance on the suspension. Some noted that the department has not requested them to process loan forgiveness for any borrowers since mid-January.
The department previously suspended debt discharges under three other income-driven repayment plans: Income-Contingent Repayment (ICR), Pay as You Earn (PAYE), and Saving on a Valuable Education (SAVE). This action followed an appeals court decision that upheld and expanded a temporary suspension of the SAVE plan. The SAVE plan, introduced by the Biden administration to offer lower payments and a quicker path to forgiveness, has been on hold as last summer due to legal challenges from a group of republican-led states.
These states argued that the 1993 statute President Joe biden used to establish the SAVE plan did not authorize loan forgiveness. As the ICR and PAYE plans were also created under the same statute, courts raised questions about the legality of their forgiveness features, despite their long-standing existence.
The Income-Contingent Repayment (ICR) plan, established in 2007, was not affected by these lawsuits as congress explicitly permitted loan forgiveness at the end of the repayment term within its authorizing legislation.
Given that ICR is not entangled in the ongoing legal disputes surrounding student loans, the education Department is encouraging borrowers seeking loan forgiveness to enroll in this plan, particularly the 7.7 million individuals currently enrolled in the SAVE plan.
Beginning August 1, interest will start accruing on loans within the SAVE program, even though borrowers’ payments remain paused due to the court injunction. A borrower enrolled in SAVE filed a petition with the courts to halt this interest accrual. While the litigation is ongoing, a tax law enacted this month by President Donald Trump terminates the SAVE plan and provides enrollees until 2028 to transition to a different plan.
The impending resumption of interest accrual and the discontinuation of the SAVE plan could lead to a significant increase in borrowers enrolling in ICR. If the suspension of loan forgiveness is not resolved promptly, these borrowers might find themselves in a different repayment plan without a clear avenue for forgiveness.
