Major Overhaul Ahead: Understanding Proposed Changes to Federal Student Loans

The U.S. Department of Education (ED) recently announced major changes to the federal student loan system, impacting both current and future borrowers.¹ These updates come at a time when student debt remains a pressing issue for millions of Americans. In addition to administrative actions, a sweeping legislative proposal, the One Big Beautiful Bill Act, was signed into law July 4^th. This legislation will significantly reshape how student loans are distributed, repaid, and managed for generations to come.²

Collections Resume for Defaulted Borrowers

After nearly five years of suspension, the ED has resumed collection activities on defaulted federal student loans. Through the Treasury Offset Program, the government is now actively garnishing tax refunds, wages, and even Social Security benefits. These aggressive measures target approximately 5.3 million borrowers currently in default, signaling a renewed effort by the federal government to recover outstanding debts.³

This change marks a notable shift from the more lenient policies that had been in place since the early days of the COVID-19 pandemic. Borrowers who were previously shielded from aggressive collection tactics must now prepare for the financial consequences of re-engaging with the federal student loan system.

Repayment Options Streamlined Under New Proposal

Now passed, the One Big Beautiful Bill Act will overhaul the current range of repayment plans, eliminating many existing options. Borrowers will instead choose between two streamlined repayment paths: a Standard Repayment Plan or a new Repayment Assistance Plan (RAP).²

Under the proposed Standard Repayment Plan, the repayment timeline would depend on the total loan amount:

• Loans up to $25,000 will be repaid over 10 years
• Loans up to $50,000 over 15 years
• Loans up to $100,000 over 20 years
• Loans exceeding $100,000 over 25 years

These payments will be monthly fixed amounts, determined at the outset.

The RAP, on the other hand, will replace all current income-driven repayment plans. While monthly payments under RAP will still be based on the borrower’s income, the repayment term will extend to 30 years before any remaining balance is forgiven—longer than the previous 20- or 25-year forgiveness periods. ⁴ New borrowers (loans after July 1^st, 2026) must select either Standard or RAP upon receiving each loan. Existing borrowers (loans before July 1^st, 2026) are allowed to keep current plans until July 1^st, 2028, then must switch.

New Limits on Deferment and Forbearance

Significant changes to deferment and forbearance are also included in the law, set to take effect in July 2025. Borrowers will no longer be permitted to pause payments due to unemployment or financial hardship, an option critical for many struggling individuals. Additionally, the bill will impose stricter limits on forbearance, capping it at nine months within any 24-month period.⁴

On a more positive note, the legislation proposes allowing borrowers to rehabilitate defaulted loans twice—a change from the previous one-time opportunity. This gives borrowers an additional chance to bring loans back into good standing through a series of on-time payments.⁵

Future Borrowers Face Loan Caps and Reduced Federal Support

With the passage of the One Big Beautiful Bill Act, sweeping restrictions for future student borrowers are set to take effect in July 2026. Federal loan limits will be directly tied to a college’s cost of attendance and the anticipated return on investment (ROI). As a result, students attending high-cost schools with low post-graduation earnings could see significantly reduced access to federal loans.

Specific borrowing limits would apply across the board:

• Undergraduate students will follow current limits, remaining unchanged.
• Graduate and professional students will face an annual cap of $20,500, and a lifetime aggregate of $100,000, depending on the program. Professional students are capped at $50,000 annually and $200,000 lifetime.
• Parents, PLUS Loans, face an annual cap of $20,000, and a lifetime cap of $65,000 per child.

These caps will also bring an end to several key federal loan programs. The Graduate PLUS Loan program—commonly used by graduate students to finance expensive degrees—will be eliminated. Additionally, subsidized loans will remain intact.

Shift Toward Private Lending

The proposed limits and program eliminations are expected to push more families toward private student loans. Currently, private lenders account for less than 10% of the student loan market⁶, but that figure may grow as federal aid becomes more restricted.

Unlike federal loans, private student loans typically carry higher interest rates, offer limited repayment flexibility, and lack forgiveness options. This shift could increase financial strain on borrowers and raise the risk of long-term debt burdens.

Staying Informed and Proactive

As federal student loan policies continue to evolve, both current and future borrowers are encouraged to remain informed and engaged. Regularly communicating with loan servicers, exploring repayment options, and monitoring legislative developments will be essential for navigating this changing landscape.

The One Big Beautiful Bill Act represents one of the most comprehensive reforms to the federal student loan system in decades. The law signals a broader shift in how the federal government approaches student lending—emphasizing fiscal responsibility, accountability, and long-term repayment.

By partnering with a knowledgeable financial advisor, you can stay up to date with the changing student loan environment and develop an effective strategy for financing higher education.

Sources:

1. Forbes: Department Of Education Takes Big Step To Change Student Loan Forgiveness And Repayment Plan Rules
2. Forbes: What Trump’s ‘One Big Beautiful Bill’ Means For Student Loan Forgiveness And Repayment
3. US News.com: Trump to Resume Collection of Defaulted Student Loans: What to Know | Education News | U.S. News
4. com: GOP Student Loan Overhaul: Here's Who Will See Lower Monthly Payments and Who Will Pay More - CNET
5. org: NASFAA | Reconciliation Deep Dive: House Committee Proposes Major Overhaul of Federal Student Loans, Repayment, and PSLF
6. org: Private-Student-Loans-Facts-and-Trends.pdf

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