Federal loan repayment plan partially blocked by courts

A pair of federal court injunctions have frozen elements of a student loan repayment plan scheduled to roll out next week, with one of the rulings arising from a lawsuit filed by Montana Attorney General Austin Knudsen and Republican attorneys general in 10 other states.

The injunctions, issued Monday evening by federal judges in Kansas and Missouri, temporarily block the final phase of President Joe Biden’s Saving on Valuable Education (SAVE) plan set to go into effect July 1. That final phase included lowering the cap on monthly student loan repayments based on a borrower’s discretionary income — one of several regulatory mechanisms Biden argued would drive down student debt for millions of Americans when announcing the SAVE plan last fall.

The U.S. Secretary of Education Miguel Cardona decried this week’s court rulings in a statement, arguing that the plan has given Americans “breathing room from bills that, too often, compete with basic needs.” Cardona added that despite the injunctions, changes already implemented in the SAVE plan’s earlier phases will continue to generate lower monthly payments for millions of borrowers already enrolled.

Meanwhile, Knudsen welcomed the injunction issued in Kansas. In a press release, he accused the Biden administration of bypassing congressional authority and characterized the SAVE plan as an “unconstitutional student loan forgiveness scheme.” Knudsen’s primary argument along with other attorneys general in the Kansas case was that such widespread debt forgiveness would reduce state revenues.

“By the [education] department’s own estimates, the ‘SAVE Plan’ would cancel over $100 billion in student debt,” Knudsen wrote. “The cancellation of the loans would directly impact Montana’s economy through a loss of state tax revenue and jobs, as well as increasing law enforcement costs.”

Montana and seven other states were dismissed from the case prior to Monday’s injunction. In an order on June 7, U.S. District Court Judge Daniel Crabtree found those states had failed to show that they would suffer direct harm as a result of the SAVE plan. Only Alaska, South Carolina and Texas, which all have nonprofit government corporations owned and serviced by student loans, were allowed to proceed in the lawsuit.

“The other eight plaintiffs assert that they have standing because the SAVE plan will reduce their income tax revenues,” Crabtree wrote in his June 7 order. “But this is an incidental effect of the SAVE plan, traceable to plaintiffs’ own decisions about how to tax revenue.”

The next phase of regulations will no longer go into effect pending the outcome of the litigation.

Among the key changes Biden is seeking through the SAVE plan are significant cuts to monthly loan payments, earlier forgiveness for students with principal balances of $12,000 or less and a zeroing-out of monthly payments for borrowers that meet certain discretionary income benchmarks. The administration has been encouraging students to enroll in the plan for months, emphasizing that its payment calculations are driven by income and family size rather than their loan balance. Individuals can still enroll as neither injunction impacted changes already implemented since last fall.

The SAVE plan is separate from Biden’s previous high-profile loan forgiveness strategy, which was rejected by the U.S. Supreme Court last year, and is also distinct from other income-driven repayment changes and debt forgiveness efforts by the federal education department in recent years.

Montana’s Office of the Commissioner of Higher Education declined to comment specifically on this week’s SAVE plan injunctions, telling Montana Free Press via email that “the Montana University System remains focused on maintaining and improving accessibility to and student success in the state’s many options for high-quality postsecondary education.” According to university system data, average loan amounts per graduate have declined by several thousand dollars across Montana campuses over the past decade, as has the number of students taking out loans — from 65% in 2013-14 to 51% in 2022-23.

Dave Kuntz, director of strategic communications at the University of Montana, said the court rulings do not impact any current UM students or financial aid practices, adding that the campus’ graduates “leave our campus with a significantly lower debt load than the national average.” Tracy Ellig, Montana State University’s vice president of communications, similarly told MTFP his campus has “little interaction with the loan repayment process,” noting that it is “largely between a graduate and the federal government.” Both did cite examples of their institutions’ efforts to educate students on financial literacy and to emphasize timely graduation as a path to incurring less debt.