Reforming Student Loans: Navigating the Shifting Landscape
In 2025, with roughly 43 million Americans owing more than $1.6 trillion in federal student debt, the landscape of higher education financing underwent significant changes. The "One Big Beautiful Bill Act" (OBBBA), signed into law in the summer of 2025, brought about sweeping reforms aimed at addressing the complexities and challenges within the federal student loan system. These reforms encompass changes to borrowing caps, repayment plans, and institutional accountability.
The Student Loan Landscape Before OBBBA
Prior to the OBBBA, the federal student loan portfolio faced considerable strain. Millions of borrowers were struggling to manage their debt, with 5 million in default and another 7 million behind on payments in the third quarter of 2025. The pandemic-era payment freeze, while providing temporary relief, ultimately led to a surge in delinquencies and defaults upon its conclusion.
During the pandemic, the Biden administration forgave nearly $189 billion in loans through initiatives like Public Service Loan Forgiveness fixes, income-driven repayment (IDR) adjustments, and borrower defense claims. From March 2020 through September 2023, most federal loans were placed in interest-free forbearance. Payments formally restarted in October 2023, but a temporary “on-ramp” shielded borrowers from credit-reporting consequences through late 2024.
The Trump administration announced an intention to increase collections and to accelerate the resumption of repayment but has been slow to do so. For example, despite the Department of Education’s announced plans to restart more aggressive methods of collecting overdue loan payments, like withholding tax refunds or garnishing wages, refund offsets did not begin until after the current tax season and the Department of Education announced that wage garnishment would restart in January.
In 2019, the Treasury reported $70 billion in student loan repayments, but that fell to $28 billion in 2022 and $27 billion in 2023 because of the pandemic forbearance. After the resumption of repayment in fiscal year 2024, payments rebounded to $60 billion and in 2025 hit $62 billion. In short, before the passage of OBBBA, steps to normalize the student loan repayment system after the pandemic-restarting payments and credit reporting-had been taken.
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Undergraduate students faced borrowing limits of $5,500 for first-year, dependent students. Graduate students and parents, however, effectively faced no borrowing limits for the past two decades. In 2025, the Department of Education expected to originate about $90 billion in new loans: 38% to undergraduates, 49% to graduate students, and 12% to parents of undergrads.
The absence of federal loan limits for graduate and professional loan borrowers led to ballooning per-student debt burdens. In 2020, the average master’s degree completer left school with $62,820 in debt, up 50% since 2000. Loans can be used not just for tuition, but also for living expenses. Roughly a third of graduate borrowing and two-thirds of Parent PLUS borrowing for undergraduate students is used to pay for non-tuition costs (like rent and food) (National Postsecondary Student Aid Study 2020).
Borrowers today face two broad paths for repaying their loans: the standard fixed plan and income-driven repayment (IDR) plans in which payments are based on borrowers’ income. By early 2025, about 60% of borrowers had enrolled in IDR plans (especially the SAVE plan, before it was frozen by litigation), while others remained on fixed schedules (Department of Education, Federal Student Aid Data Center 2025).
The system lends to all students on nearly identical terms, but students attend very different schools, with varied resources, programs, and career pipelines. For similar reasons, the amount of debt owed by a borrower can be a misleading indication of financial hardship. Paradoxically, the borrowers with the largest balances have better repayment outcomes than those with lower balances, on average. This is because they are often the most educated-lawyers, doctors, MBAs-and typically earn enough to manage their debts.
New Borrowing Caps Under OBBBA
One of the major changes introduced by OBBBA is the implementation of borrowing caps for Parent PLUS loans and most graduate loans. Parent PLUS loans will be capped at $20,000 per year and $65,000 lifetime per dependent student. Graduate students will face new ceilings: Most programs are capped at $20,500 annually with a $100,000 aggregate maximum, while students in professional programs such as law and medicine may borrow up to $50,000 annually and $200,000 in aggregate. These changes are scheduled to take effect for the 2026-2027 academic year (starting July 1, 2026). Existing borrowers enrolled in an institution of higher education prior to that date will be allowed to borrow under the old limits for three years or until they complete their current program (whichever comes first), except that part-time students’ loans will still be prorated beginning this year.
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The Congressional Budget Office expects loan limits to reduce the cost of graduate loans by $44 billion over 10 years. A sizable share of graduate borrowers will be affected by these limits. On an annual basis, about 26% of graduate students currently borrow above the new annual caps. Looking at students who are completing a degree, about 40% have cumulative debt that exceeds the cumulative graduate limit. That corresponds to roughly 370,000 graduate and professional students (of 3.6 million graduate-level students and 1.4 million federal borrowers in a given year) or about 200,000 students completing a degree (of 1.1 million completers, of whom 500,000 borrowed). Across all graduate fields, this corresponds to roughly $8 billion in annual federal lending that would no longer be disbursed once the caps take effect.
The share of graduate borrowers impacted by the new limits varies by credential level and field. At the credential level, about 41% of master’s degree recipients who borrowed and 27% of professional student borrowers exceed the new lifetime limits. (In 2020, about 344,000 master’s degree recipients-48% of all such degree recipients-and 93,000 professional degree recipients-75%- borrowed federal loans.) Most of the reduced loan eligibility due to the new caps will come from their impact on master’s programs, accounting for nearly $6 billion (out of $10 billion) of the total federal loan volume above the new caps.
Borrowing above the cap is highest among students in longer or higher-cost programs. Master’s degree students in STEM and health disciplines represent a large share of affected borrowers, reflecting both longer program durations and higher tuition. Additionally, professional degrees such as law and medicine and other health related fields are particularly affected. By contrast, shorter graduate certificates and post-baccalaureate programs will be less affected by the caps-only about 19,000 completers in these programs borrow above the new thresholds-but they still account for roughly $600 million in borrowing above the new caps. This is because these programs often serve older or part-time students, often with prior graduate debt.
Some experts believe that instead of universities dropping rates, they expect students to find other ways to fund education. It is anticipated that individuals are going to seek private loans.
According to government data, about 3.6 million people held Parent PLUS loans last year, totaling about $116 billion.
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Streamlined Repayment Plans: The Repayment Assistance Program (RAP)
The second important set of higher education policies in OBBBA are provisions to streamline repayment plans. Students who first borrow on or after July 1, 2026 will be offered only two options when they enter repayment: a new “tiered standard” plan, with repayment term lengths that vary by balance, and a single new income-driven option called the Repayment Assistance Plan (RAP). Some legacy plans-Income-Contingent Repayment (ICR), Pay As You Earn (PAYE), Revised Pay As You Earn (REPAYE), and SAVE-will remain available temporarily only for loans originated before that date, and borrowers on those plans must choose to move to Income-Based Repayment (another income-driven plan), RAP, or a fixed payment plan by 2028. Borrowers in legacy plans who do not choose a repayment plan will be automatically enrolled in RAP. Current borrowers enrolled in ICR, PAYE, or SAVE plans must transition to a new repayment plan by July 1, 2028.
Under the new tiered standard plan, the term of repayment will be longer for borrowers with larger initial balances.
The new Repayment Assistance Plan (RAP) is best understood as a successor to existing plans like PAYE or REPAYE rather than a wholesale redesign. Annual payment burdens under RAP and REPAYE are nearly identical for middle-income borrowers but diverge at the edges: Payments rise more steeply for high earners and low-income borrowers must pay at least $10.
RAP replaces the discretionary-income framework with a tiered schedule based on total adjusted gross income (AGI). Borrowers pay 1% of AGI between $10,000 and $20,000; 2 percent between $20,000 and $30,000; and so on, increasing by one percentage point for each additional $10,000 of income until reaching a maximum of 10% for incomes above $100,000. Every borrower must make at least a $10 monthly payment, regardless of income, and receives a $600 annual reduction in required payments for each dependent child.
RAP also embeds two implicit subsidies that ensure balances decline over time for borrowers who make their monthly payments on time. First, any unpaid interest in a given month is automatically waived-ensuring that balances do not grow when required payments are less than interest accrued. Second, RAP introduces a “principal subsidy”: the first $50 of a scheduled payment is credited toward reducing the loan’s principal (even if the payment does not cover the accrued interest).
Balances remaining after 30 years of qualifying payments are forgiven, extending the repayment horizon relative to prior IDR plans (for example, 20 years for undergraduate and 25 years for graduate borrowers under REPAYE). Modeling of lifetime repayment outcomes shows that RAP will increase total payments and reduce effective subsidies for most low- and moderate-income borrowers relative to prior income-driven plans. Borrowers starting with annual incomes below about $40,000 repay a larger share of their original balances because they no longer qualify for $0 payments and must remain in repayment for up to 30 years rather than 20 or 25.
RAP’s structure standardizes repayment parameters across all borrowers and replaces multiple income-driven repayment options with a single formula that links payments to total income, eliminates negative interest amortization, and provides a guaranteed pathway to forgiveness after three decades of consistent repayment. Compared to repayment options available when OBBBA was passed (including the SAVE plan), these changes will reduce the government’s effective subsidy per dollar lent by increasing the repayment horizon and increasing monthly payments.
One major change Congress implemented with RAP is the elimination of what's called negative amortization, or the possibility for loan balances to grow when interest accumulates faster than monthly payments can cover.
It's important to note that the key parameters of RAP are not indexed to inflation, meaning that over time, rising nominal incomes will push borrowers into higher payment brackets even if their real purchasing power remains unchanged.
Concerns About RAP
RAP departs radically from the core design tenets of all previous income-based repayment plans. RAP scraps the approach of excluding a base portion of a borrower’s annual income for basic needs and instead bases a borrower’s payment on their gross income, rather than their discretionary income.
For an income-based plan to work, a borrower’s monthly payment must actually be affordable. If it isn’t, borrowers will continue to default.
RAP will have borrowers pay a changing percentage of their total income as it increases.
Institutional Accountability: "Do No Harm" Standard
OBBBA introduces a new “do no harm” standard that links federal loan eligibility to graduates’ median earnings after completion. Programs whose graduates earn less than the typical high school graduate (or bachelor’s degree-holder, for graduate programs) risk losing access to student loans.
Economic Effects of OBBBA
OBBBA’s reforms may moderate student debt growth and shift repayment risk toward borrowers but are unlikely to impose major short-term macroeconomic shocks; the major economic adjustment already occurred with the 2023-2025 repayment restart, which reduced consumer spending and credit scores as millions resumed payments.
Legislative Proposals for Further Reform
Several legislative proposals have been introduced to address specific aspects of student loan reform:
- Rep. Harder's bill: Delay, until July 1, 2030, both the termination of authority to award Federal Direct PLUS loans to graduate and professional students and the implementation of new loan limits for those students when they are enrolled at certain covered institutions. The delay would apply to graduate and professional programs offered by health professions schools, institutions offering health professions or qualifying nursing programs, provided the institution is located within 100 miles of a designated health professional shortage area or serves a medically underserved community.
- Sen. Banks' bill: Eliminate origination fees on all Federal Direct Loans.
- Rep. Lawler's bill: Revise the Higher Education Act’s definition of “professional degree” by removing the outdated regulatory reference and explicitly defining the term in statute.
- Rep. Torres' bill: Fully reverse the graduate and professional student loan restrictions enacted under the OBBBA.
- Rep. Kennedy's bill: Set uniform annual and aggregate borrowing limits for graduate and professional students under the Federal Direct Unsubsidized Loan program.
- Rep. Chu's and Sen. Padilla's bill: Restore subsidized loan eligibility for individuals seeking a graduate degree.
- Sen. Grassley's and Rep. Miller-Meeks' bill: Propose changes to federal student loan borrowers' counseling and disclosure requirements.
- Rep. Babin's and Sen. Rosen's bill: Provide interest-free deferment on federal student loans for borrowers serving in a medical or dental internship or residency program.
- Rep. Lawler's bill: Lower interest rates on federal student loans to 2%.
- Rep. Waters' bill: Allow Parent PLUS loan borrowers to repay their loans under income-contingent repayment (ICR) or income-based repayment (IBR) plans.
- Rep. Roy's and Sen. Lee's bill: Eliminate the current federal student loan program and replace it with “federal direct simplification loans”.
- Sen. Tuberville's bill: Set new borrowing limits for graduate ($20,500 annually, $65,000 total) and professional students ($40,500 annually, $130,000 total).
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