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Student loan forgiveness is paused after court challenge. Here's what you can do.

Appeals court pauses student debt relief plan
Appeals court temporarily halts Biden's student debt relief plan 00:28

About 40 million Americans with student debt are now in limbo following an appeals court's stay on Friday that put a halt — for now — to President Biden's student loan forgiveness program. 

Already, 22 million people have applied to the program — designed to forgive as much as $20,000 in student debt per borrower — since the application went live earlier this month. But on Friday, the 8th Circuit Court of Appeals issued a temporary stay in response to an emergency motion brought by attorneys for several Republican-led states. 

The ruling has prompted questions about what the stay means for borrowers —  especially those who have already applied for debt relief — and what may happen next as legal challenges unfold. The court's roadblock may increase financial anxiety for borrowers especially as the student debt repayment hiatus, instituted during the pandemic, expires in December. That means repayments are set to begin again in January. 

"It's such a rollercoaster for borrowers emotionally," noted Laurel Taylor, CEO of Candidly, a student debt and savings service. 

Even so, she said, "The best thing borrowers can do for themselves now is apply" for the debt forgiveness program. 

Secondly, Taylor added, "Prepare for the worst case scenario, which is repayments beginning on January 1."

On Monday, the Biden administration said in a response that the states had failed to prove they would be hurt by the debt relief program, according to USA Today. It also argued that any limitation to the program should be handed down in the states that are suing, which would impact about 2.8 million people with student loans. 

What does the stay mean? 

The temporary hold was placed after a lower court ruled that the September lawsuit from the GOP states lacked standing.

In their appeal of that lower court ruling, the plaintiffs — which include Iowa, Kansas, Missouri, Nebraska, South Carolina and Arkansas — said the forgiveness program will irreparably harm their states' student loan programs.

The stay is not based on the merits of that case, but allows for further briefings on the issue.

"The stay prohibits the administration from discharging any debt until the court rules on the appellants' motion for a preliminary injunction pending appeal, but it does not prohibit the administration from collecting or reviewing applications," noted Heights Securities analyst Benjamin Salisbury in a Monday research note. 

Is the debt-relief application still open? 

Yes, because the stay only halts the discharge of debts. The application for debt relief remains open, with the U.S. Department of Education noting on its site, "We encourage you to apply if you are eligible."

"We will continue to review applications. We will quickly process discharges when we are able to do so and you will not need to reapply," the Education Department said.

What happens next with the courts? 

Both sides in the lawsuit will respond to the court by Tuesday, October 25, Salisbury said in his note. The case "is expected to be reviewed swiftly," he added.

No matter the outcome, it's unlikely to be the last step in the legal process, he noted. 

"No matter the decision of the Eighth Circuit Appeals Court, we expect either side to appeal to the Supreme Court, with the decision to be reviewed first by Justice Brett M. Kavanaugh," he wrote. 

Where does this leave borrowers? 

For the moment, in limbo, experts say. 

In the meantime, borrowers can take several steps. As mentioned above, experts recommend that borrowers apply for debt relief, if they haven't already. 

But be prepared to restart your payments in January based on your current outstanding balance, Taylor of Candidly said. 

Because the government paused repayments during the pandemic, it's been more than two years since borrowers had to make payments on their debt, she pointed out. 

"We have been in a moratorium, so my fear is that borrowers won't understand that on January 1 they do have to enter back into repayment," she said. "Have a plan and a strategy around that."

How should I prepare for repayment?

Check which servicer now holds your debt because there have been changes during the pandemic, such as Navient exiting the student loan program. 

Secondly, get a handle on how much you'll owe in January without debt relief from the Biden program, Taylor said. 

"Number one is having the fundamentals down: How much do I owe, who do I owe?" she added. 

Next, review your budget. The typical monthly repayment is about $400, and during the pandemic, families got used to deploying that money elsewhere, she added. "Budgeting is critical. Find out what you can pay and allocate" that money to the repayments, she said.

Lastly, explore income-based repayment programs, which can help lower your monthly payments based on your discretionary income, Taylor recommended. 

And keep an eye out for the Biden administration's new income-based repayment plan, which was announced at the same time as the student-debt forgiveness plan but which didn't get as much attention at the time, she added. 

This new income-based plan will limit the monthly amount that borrowers pay to 5% of their discretionary income, from 10% currently. And program will increase the amount that is considered non-discretionary income to about $31,000 from about $20,000, protecting more of a person's income from going to debt repayment. 

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