Several income-driven repayment (IDR) plans, which provide borrowers with lower monthly payments, are being questioned in court and may not exist by the end of the year.
The Saving for a Valuable Education (SAVE) plan has been blocked since July, and a recent decision by the 8th U.S. Circuit Court of Appeals questioned the structure of other IDR plans.
In response, the Department of Education closed online applications for IDR plans. The administration also recently told student loan servicers to stop accepting and processing IDR applications for three months, according to a memo obtained by The Washington Post. Servicers are companies assigned to handle billing and services for student loans.
Investopedia asked Scott Buchanan, executive director of the Student Loan Servicing Alliance, about how student loan servicers are dealing with the uncertainty around income-driven repayment (IDR) plans. This interview has been edited for brevity and clarity.
INVESTOPEDIA: What are loan servicers paying attention to regarding IDR plans?
SCOTT BUCHANAN: There’s a lot happening right now, and the Department [of Education] has been wrestling with last week’s direction from the 8th Circuit Court of Appeals.
The Court of Appeals remanded the matter to the circuit court, which means that the circuit court now needs to revise the current injunction. I haven’t seen that we’ve gotten that yet, so I assume the department is waiting to see what the precise language of the revised injunction is going to look like.
The whole problem with the SAVE litigation is that it opened up this can of worms regarding the last 10 years of iterated [income-driven] plans and now has put them all squarely in the gray zone. Are they going to be permitted? So I think that’s why the department has taken down the applications until they can sort out what plans the court is going to allow to be offered.
INVESTOPEDIA: What’s the general attitude of loan servicers about the uncertainty of IDR plans right now?
BUCHANAN: We’ve been living through what I would describe as regulatory ping-pong for the last several years. We create these one-time programs, create these waivers, and then those have expiration dates, and then we partially launch SAVE, and then we fully launch it six months later. So, it has been a constant back and forth of operational change that is very frustrating. Because for us, it’s this constant whipsaw back and forth of what we’re supposed to tell borrowers, what options are available and which ones aren’t.
I’m hopeful that the certainty that a court directive about what survives under the statute and what doesn’t will give us some clarity going forward. So at least we can say, well, here’s the lay of the land, here’s what’s available today—unless Congress makes an active change. While this moment is just as chaotic as six months ago, in some respects, with the resumption of repayment, I think it’s likely we are on a path forward to at least get more clarity about what’s going to be available.
Simplifying student loan options has always been a goal of ours. It is incredibly confusing to have four or five different versions of income-driven repayment: standard, graduated, extended, and consolidation. Our view is: if we could get down to a handful, whether it’s one, two, or three options that meet borrowers where they are, that would be better for them… [Simplification] may be partially the end result of a court ruling here.
INVESTOPEDIA: Are borrowers calling loan servicers more, and how are the servicers dealing with that?
BUCHANAN: Every time there are these news stories about a big change or the department makes a change in policy, we get the phone calls. We’re the front lines of hearing from people about this.
There is a small subpopulation of people that we do hear from who are SAVE borrowers, which are those people who may be close to Public Service Loan Forgiveness (PSLF). Because obviously, the forbearance that they’re in on SAVE doesn’t clock against PSLF. So if you’re nine years and six months in and you’ve only got four months left to go to get loan forgiveness, a lot of them would like to go into IBR. Right now that option is not available because the department has taken that down.
We also have four years of people who were graduating, who were never in repayment. So this is not a resumption of repayment; it is a beginning of repayment. Most people, when you come out of school, you are in a standard repayment plan, right? That is the default, and then you can request an alternate repayment plan. But right now, for them, that option isn’t available.
I share the frustration of the moment. The problem for us is there’s not a whole lot we can do until the courts settle this out.