Lawsuit Against SAVE Student Loan Forgiveness Likely To Fail

Republicans have filed a lawsuit to block President Biden’s Saving on a Valuable Education (SAVE) repayment plan. 

The 38-page lawsuit was filed by 11 Republican states, including Alabama, Alaska, Idaho, Iowa, Kansas, Louisiana, Montana, Nebraska, South Carolina, Texas and Utah. This effort is led by Kansas Attorney General Kris Kobach. 

Four of the states, Nebraska, Kansas, South Carolina and Iowa, were among the six states that challenged the President’s previous broad student loan forgiveness plan in 2022. A fifth state, Missouri, plans to file a similar lawsuit with other states. 

In response to the 2022 lawsuit, the U.S. Supreme Court published an opinion on June 30, 2023 which blocked the President’s previous forgiveness plan in a 6-3 decision. [Biden v. Nebraska, 143 S. Ct. 2355 (2023)]

The multi-state coalition hopes to repeat this result with the new lawsuit.

However, this lawsuit against SAVE will ultimately fail because of the sound statutory and regulatory basis for the new repayment plan. 

SAVE Student Loan Repayment Plan

The Biden administration created the SAVE repayment plan by modifying the regulations that established the REPAYE plan in 2015. The public comment period on the Notice of Proposed Rulemaking (NPRM) ended on February 10, 2023, with submission of 13,635 public comments. The final rule was published on July 10, 2023 and goes into full effect on July 1, 2024, with some provisions designated for implementation prior to that date.. The U.S. Secretary of Education subsequently designated more of the regulatory provisions for early implementation by publishing notices in the Federal Register on October 23, 2023 and January 16, 2024.

There are five key differences between the SAVE and REPAYE plans:

• Definition of Discretionary Income. The SAVE plan subtracts 225% of the poverty line from adjusted gross income (AGI), up from 150% of the poverty line under the REPAYE plan. As with the other income driven repayment plans, if discretionary income is less than or equal to zero, the monthly payment will be zero. 
• Percentage of Discretionary Income. The SAVE plan bases the monthly payments on 5% of discretionary income for undergraduate debt and 10% of discretionary income for graduate debt, compared with 10% of discretionary income for all education debt under the REPAYE plan.
• Maximum Repayment Term. The repayment term under the SAVE plan is 20 years for undergraduate debt (240 payments) and 25 years for graduate debt (300 payments), like the REPAYE plan, but the SAVE plan uses a weighted average for borrowers who have both types of debt. The REPAYE plan sets the repayment term at 25 years for borrowers with any amount of graduate debt. In addition, the SAVE plan has a shorter repayment term for borrowers who started off with less debt. A borrower’s whose original principal loan balance was less than $12,000 has a 10-year repayment term (120 payments), with an additional year for each additional $1,000 in debt. With both the SAVE and REPAYE plan, the remaining debt is forgiven at the end of the repayment term. 
• Accrued But Unpaid Interest. When a required payment is less than the new interest that accrues, the unpaid interest is capitalized under the REPAYE plan and waived under the SAVE plan. 
• Marriage Penalty. If a married borrower files separate federal income tax returns, the monthly payment under the SAVE plan is based solely on the borrower’s income. If a married borrower files a joint return, the loan payment under the SAVE plan is based on the combined income of the borrower and spouse. With the REPAYE plan, the loan payment is based on the combined income regardless of the tax filing status.

According to the Congressional Budget Office (CBO), the SAVE repayment plan is expected to cost an additional $230 billion over ten years.

So far, 7.7 million borrowers have signed up for the SAVE repayment plan. Borrowers who were in the REPAYE plan were automatically switched into the SAVE repayment plan. 

The SAVE repayment plan will go into full effect on July 1, 2024. However, the U.S. Secretary of Education implemented some of the regulatory changes early, using the statutory authority under the Higher Education Act of 1965 [20 USC 1089(c)].

In particular, the U.S. Department of Education implemented the accelerated loan forgiveness provision for borrowers who graduated with less debt, forgiving $1.2 billion for 152,880 borrowers on February 21, 2024. That’s an average of about $8,000 in forgiveness per borrower. These borrowers were already in repayment for at least 10 years.

For reference, slightly less than half of these borrowers (47%) were in red states and 53% in blue states, according to data published by the U.S. Department of Education.

Current ICR Rules Provide Broad Regulatory Authority

Kansas Attorney General Kobach claims that the Higher Education Act of 1965 doesn’t permit this type of loan forgiveness. He also says that President Biden “doesn’t have the authority to alter student loan repayment plans.”

But, Congress provided the U.S. Department of Education with broad regulatory authority to modify the Income-Contingent Repayment (ICR) plan when it enacted the William D. Ford Federal Direct Loan Program through the Higher Education Amendments of 1992 [P.L. 102-325, 7/23/1992] and the Student Loan Reform Act of 1993 as part of the Omnibus Budget Reconciliation Act of 1993 [P.L. 103-66, 8/10/1993].

• Repayment Term. The repayment term must be “an extended period of time prescribed by the Secretary, not to exceed 25 years” but can be shorter than 25 years. [20 USC 1087e(d)(1)(D)] The repayment term cannot be less than 5 years. [20 USC 1078(b)(9)(A)] Otherwise, Congress did not define what it meant by an “extended period of time.” Congress clearly contemplated having a repayment term of less than 25 years, and provided the U.S. Department of Education with the authority to determine the maximum repayment term. 
• Definition of Discretionary Income and Percentage of Discretionary Income. The definition of discretionary income falls within the authority of the U.S. Department of Education to define an appropriate portion of annual income. “Income contingent repayment schedules shall be established by regulations promulgated by the Secretary and shall require payments that vary in relation to the appropriate portion of the annual income of the borrower (and the borrower’s spouse, if applicable) as determined by the Secretary.” [20 USC 1087e(e)(4)] This statutory language enables the U.S. Department of Education to define discretionary income and to specify a percentage of discretionary income. 
• Details of the Repayment Plan. In addition, the U.S. Department of Education has the authority to define the repayment plan. “The Secretary shall establish procedures for determining the borrower’s repayment obligation on that loan for such year, and such other procedures as are necessary to implement effectively income contingent repayment.” [20 USC 1087e(e)(1)] 
• Capitalization of Interest. The U.S. Department of Education can set limits on the capitalization of interest. “The Secretary may promulgate regulations limiting the amount of interest that may be capitalized on such loan, and the timing of any such capitalization.” [20 USC 1087e(e)(5)]
• Eligibility of Parent PLUS Loans. Parent PLUS loans are not directly eligible for ICR, but can become eligible if included in a Federal Direct Consolidation Loan. [20 USC 1087e(d)(1)(D)]
• Marriage Penalty. “A repayment schedule for a loan made under this part and repaid pursuant to income contingent repayment shall be based on the adjusted gross income (as defined in section 62 of title 26) of the borrower or, if the borrower is married and files a Federal income tax return jointly with the borrower’s spouse, on the adjusted gross income of the borrower and the borrower’s spouse.” [20 USC 1087e(e)(2)]
• Forgiveness of Remaining Debt. All of the income-driven repayment plans are effectively loan forgiveness plans, forgiving the remaining debt after a specified number of years in repayment, including ICR, IBR, PAYE and REPAYE. [20 USC 1098e(b)(7), 20 USC 1087e(e)(7)] This authority was manifested in the regulations at 34 CFR 685.209(a)(6), 34 CFR 685.209(b)(3)(iii)(D) and (E), 34 CFR 685.209(c)(5) prior to the creation of the SAVE plan.

This statutory authority is not just a theoretical legal argument. This statutory authority has already been used to create the Pay-As-You-Earn (PAYE) repayment plan in 2012 and the Revised Pay-As-You-Earn (REPAYE) repayment plan in 2015.

In creating these repayment plans through regulations, the U.S. Department of Education exercised each of the various aspects of regulatory authority, including making changes in the repayment term (from 25 years to 20 years), the definition of discretionary income (from the amount by which AGI exceeds 100% of the poverty line to the amount by which AGI exceeds 150% of the poverty line), and the percentage of discretionary income (from 20% to 15% and 10%). 

I was involved in the design of the Income-Based Repayment (IBR) plan and Public Service Loan Forgiveness (PSLF). In particular, I developed a policy version of an income-driven repayment plan calculator that allowed policymakers to explore the impact of changes in the number of years until forgiveness, the percentage of discretionary income, the definition of discretionary income, capping payments at the standard repayment amount, means-testing forgiveness and the interaction with up-front student loan forgiveness.

At the time, IBR was envisioned as a safety net for borrowers whose debt exceeds their income. IBR was also intended to eliminate student loan debt as a disincentive for borrowers to pursue careers in public service. 

Are There Any Limits To The President's Authority?

It is reasonable to ask what are the limits to the statutory authority, if any. Could the U.S. Department of Education reduce the repayment term to a single year and/or define discretionary income as income over $1 million? Could they make changes that might put the solvency of the program in jeopardy? 

But, while Congress was concerned about income-contingent repayment becoming a form of indentured servitude, debating a reduction of the repayment term from 40 years to 25 or 20 years, they did not set a lower bound other than five years. They also discussed capping the total payments at a percentage of the original loan balance. 

So, while Congress may have contemplated lower limits, they decided to provide the U.S. Department of Education with broad regulatory authority, leaving the statutory language flexible. They did not choose to limit this flexibility even after the U.S. Department of Education used it to implement the PAYE and REPAYE repayment plans.

As currently constituted, arguments that the U.S. Department of Education has gone too far with the SAVE repayment plan present a slippery slope argument. If one can’t set the percentage of discretionary income at 5%, how is 10% any less arbitrary? If 5% is unacceptable, what about 6%, 7.5% or 9%? If one can’t set the repayment term at 10 years, how is 20 years or 25 years any different? If the multiple of the poverty line can’t be set at 225%, how is 150% any different? 

This plan is also very different from the original student loan forgiveness by executive order that was struck down by the courts.

Can SAVE Be Blocked?

Generally, new regulations can be blocked using the Congressional Review Act of 1996 (P.L. 104-121) and Administrative Procedures Act (P.L. 79-404). 

The Congressional Review Act (CRA) allows Congress to overturn new regulations within 60 legislative days, which works out to be about 5 or 6 calendar months. Given the split control of Congress, Congress is unlikely to pass a joint resolution to block the new regulations, certainly not with a veto-proof two-thirds supermajority. 

Indeed, such a resolution passed in the House along a party line vote of 210 to 189 (H.J.Res. 88), but failed to pass in the Senate by a vote of 50 to 49 against. 

The Administrative Procedures Act (APA) allows the courts to block a regulation that is "arbitrary and capricious, an abuse of discretion, or otherwise not in accordance with the law.” [5 USC 706(2)(A)] However, if the U.S. Department of Education followed proper procedure in drafting the new regulations, they are likely to survive court challenge. They must have engaged in a reasoned consideration of the facts and law, and considered potential alternatives to the proposed rule. 

The lawsuit objects to the 30-day public comment period, saying that it was inadequate because of the complexity of the rule, and therefore a violation of the APA. They suggest that a 60-day public comment period would have been more appropriate. Yet, 13,635 people submitted public comments on the NPRM for the SAVE plan, almost as many as the previous record of 13,922 public comments submitted in response to the gainful employment NPRM. 

It is also unclear if the plaintiffs have the legal standing to bring the lawsuit. The lawsuit says that the states were harmed because it reduced state income tax revenue, since the forgiveness is not considered income. But, that’s due to the American Rescue Plan Act, which excludes student loan forgiveness from income through December 31, 2025. It is also because state laws in eight of the states (Alabama, Idaho, Iowa, Kansas, Louisiana, Montana, Nebraska, and Utah) base state taxable income on the federal definition of taxable income. They could easily have passed a state law to count student loan forgiveness as income. By this logic, all income-driven repayment plans, as well as the death and disability discharges, cause harm to the states, not just the SAVE repayment plan. 

Related: State Taxes And Student Loan Forgiveness

The lawsuit also argues that the SAVE plan reduces the incentive for borrowers to pursue Public Service Loan Forgiveness. But, the SAVE plan reduces the repayment term mainly for borrowers who are living below the poverty line. So, unless the states are admitting to paying starvation wages to public service workers, this argument is rendered moot.

The rest of their arguments, such as blaming the SAVE plan for inflation, are even more tenuous. 

In Biden v. Nebraska, the U.S. Supreme Court considered the major questions doctrine, which requires clear and unambiguous statutory text authorizing a specific agency action for questions involving “vast economic and political significance.” Yet, Congress authorized each of the levers used by the U.S. Department of Education in implementing the SAVE repayment plan. This is also not a de novo interpretation of the statutory authority, given that the U.S. Department of Education previously used this authority in implementing the PAYE and REPAYE repayment plans. 

Democrats Seek To Protect SAVE Officially

A group of 14 Democrats in the Senate has introduced legislation to codify the SAVE plan into law. This will protect it from being changed or rescinded under a future Republican administration. 

The Codifying SAVE Plan Act (S. 4058) was introduced in the Senate on March 27, 2024.

Similar legislation was introduced in the House last year (H.R. 6593) on December 5, 2023.

However, given the split control of Congress, this legislation is unlikely to become law.