On July 4th, 2025, President Trump signed into law the One Big Beautiful Bill Act (commonly called the “Big Beautiful Bill”) after narrow passage by Congress. In addition to SNAP (subsidized food benefits) and Medicaid (subsidized medical care), the bill effectively reforms federal student loan programs.
Going forward, students and their families must take into account new rules and guidelines for both borrowing and repaying federal money for college and/or graduate school.
How the bill affects federal student loan repayment
The bill phases out all existing income‑driven repayment plans—including SAVE, PAYE, and ICR—and replaces them with two options:
- A standard, fixed payment program with terms of 10-25 years
- The Repayment Assistance Plan (RAP) that uses the borrower’s income to determine their monthly payment amount (1%-10% of adjusted gross income), up to a term of 30 years.
Current holders of federal student loans have until July 1, 2028 to convert to one of these two repayment plans. It’s also important to note that if you are one of the 7.7 million borrowers in the SAVE program, interest on your loan will begin to accrue starting August 1, 2025.
As of July 1, 2026, new federal student loan borrowers will need to sign up for one of the two new repayment options. Which one should you choose? It depends.
With the standard, fixed payment plan, you’ll know exactly what your repayments and terms will be. On the other hand, if you are uneasy about committing to a repayment amount before you join the workforce and start earning a paycheck, you may be more comfortable choosing the Repayment Assistance Plan. The RAP plan also contains two notable features designed to help lower income borrowers. First, any interest not covered by the monthly payment is waived. And second, there is a subsidy for those whose payments barely reduce their loan’s principal amount. If your monthly payment reduces your principal by only $10, the federal subsidy will kick in to reduce it by $50 (this is just an example).
What about repayment deferment and forbearance?
There are two ways to ‘pause payments’ on federal student loans: deferment and forbearance. What are the differences between them? First, deferment typically lasts longer than forbearance, and second, interest does not accrue on certain federal student loans in deferment while it does on loans in forbearance.
In-school payment deferment (waiting until after graduation to begin loan repayment) will still be available for students enrolled at least half-time. However, as of July 1, 2027, new borrowers will no longer be able to defer their payments after graduation due to unemployment or economic hardship.
Loan forbearance, the second form of payment suspension, will still be available for students experiencing financial difficulties. However, the length of time a borrower can be in forbearance will be shorter: 9 months instead of 12.
One notable exception is for students who pursue a career in public service or the non-profit sector. In such cases, they may still be eligible for Public Service Loan Forgiveness (PSLF).
New loan limits: how the bill impacts how much you can borrow for college
Direct Student Loans
There are two basic types of federal student loans. Direct Subsidized loans are for students that demonstrate financial need. The government pays the accruing interest on these loans while they’re in deferment to ease the overall financial burden on the borrower. Direct Unsubsidized loans are for students who don’t demonstrate financial need and therefore are responsible for paying all the interest on their loans.
The Big Beautiful Bill caps the maximum aggregate borrowing limit per student at $257,500 for both Direct Subsidized loans and Direct Unsubsidized loans.
Parent Plus Loans
Parents or guardians who take out Parent Plus loans before July 1, 2026 can continue to borrow under the current guidelines until the 2028-2029 academic year. Parent Plus loans will still be available for those who apply after July 1, 2026, but loan amounts will be capped at $20,000 per year with a maximum cap of $65,000 per child. Additionally, Parent Plus loans will only be available after exhausting the student’s annual Direct (subsidized or unsubsidized) loan eligibility.
Graduate School Loans
As for graduate students, the Grad Plus program will be eliminated on July 1, 2026. Students will no longer be allowed to borrow up to the total cost of their graduate degree. Instead, borrowing amounts will be capped at $20,500 a year with a lifetime graduate school maximum limit of $100,000.
There are exceptions in the bill for students seeking a professional graduate degree. If, for example, you’re studying to become a medical doctor or a lawyer, you can borrow up to $50,000 a year with a maximum aggregate cap of $200,000.
What about Pell Grants?
Pell Grants are for lower income students. The new bill actually expands Pell Grants to include job-training programs. On the other hand, as of July 2026, students who qualify for a full-ride scholarship or have a very low Student Aid Index may become ineligible. The bill also raises the full-time requirement to 15 credits (up from 12).
How does the Big Beautiful Bill impact college and university financial aid programs?
One objective of the Big Beautiful Bill is to incent higher education to validate its value. Under the new bill, schools risk losing federal funding for academic development and research programs if undergraduates end up earning less after graduation than someone with only a high school diploma. This could curtail a school’s financial aid program and therefore limit its ability to compete for incoming classes.
Additionally, the bill applies a higher tax rate on colleges with endowments: anywhere from 1.4 to 8%. Since colleges use their endowments to fund financial aid programs, this tax may also impact the amount of money they can award to students in the form of scholarships and grants. Again, there is an exception here. Institutions with fewer than 3,000 students are exempt from the endowment tax.
Now for the good news.
While the Big Beautiful Bill definitely impacts how undergrad and grad students pay for college, the new rules and guidelines ease in over a period of several years. Despite the new lending limits, there will still be plenty of federal funding available and the two new repayment plans provide a choice of fixed payments or income-based payments – the latter similar to the current IDR (Income Driven) repayment plan.
It’s also important to remember that private student loans will always be an option for covering college expenses when college savings plans, federal loans, grants and scholarships fall short. In many cases, a private loan offers more deferment and forbearance options, especially for students experiencing financial hardship or job loss.
Now more than ever your school’s financial aid office should be your first call when determining the best way to pay for your education. Their financial aid officers are true heroes and guide millions of students and their families every year through the college financing planning process. If you have more questions about how the Big Beautiful Bill impacts your particular situation they will be glad to answer them.