Federal Court Halts Income-Driven Repayment Plans: Key Implications for Borrowers

A federal court recently raised concerns about aspects of income-driven repayment (IDR) plans, leading the Department of Education to halt applications for all such plans. This move directly affects borrowers actively involved in IDR plans, as they now face difficulties in recertifying. Without recertification, many might encounter increased monthly payments. In such situations, borrowers can seek forbearance or deferment to temporarily delay payments while awaiting the lawsuit’s conclusion.

In February, a U.S. appeals court blocked the Saving on a Valuable Education (SAVE) plan, questioning various components of other IDR plans. Consequently, the Department of Education suspended applications for all IDR plans. Borrowers engaged in Income-Contingent Repayment (ICR), Income-Based Repayment (IBR), or Pay As You Earn (PAYE) plans are currently unable to recertify their loans.

Those under a repayment plan must provide updated details about their income and family size annually to verify payment amounts. This manual recertification requires the same application each year.

Failing to recertify your PAYE or ICR plan results in remaining on the plan, though your monthly payment might increase to match a Standard Repayment Plan. For those in the IBR plan, similar to PAYE and ICR, unpaid interest is added to the principal loan balance if recertification does not occur.

Notwithstanding recertification issues, the time towards loan forgiveness continues to count with these higher payments under the IDR plans.

Skipping the increased payment each month leads to loan delinquency, potentially escalating to default. To prevent this, borrowers can apply for forbearance or deferment, pausing due payments, or opt for reduced temporary payments. However, forbearance has a limit and interest will continue to accrue during pauses.

“They could switch to a plan that’s not based on income,” advised Betsy Mayotte, president of The Institute of Student Loan Advisors. She highlighted other options like graduated repayment and extended repayment, though they may not contribute to loan forgiveness and might not offer significantly lower payments.

Borrowers enrolled in the SAVE plan remain under administrative forbearance, sparing them from immediate payment obligations and recertification worries.

Borrowers could contemplate securing a personal loan or refinancing with a private lender. However, private loans generally incur higher costs compared to federal loans, stripping away federal protections, Mayotte cautioned. “There’s no need for hasty decisions based on recent changes,” Mayotte observed. “Ultimately, clarity will prevail.”