Major Student Loan Overhaul Takes Effect July 1: What Borrowers Need to Know
On July 1, the most sweeping changes to the U.S. federal student loan system in decades take effect, impacting roughly 43 million Americans who collectively hold $1.7 trillion in federal student loan debt. The changes, stemming from the One Big Beautiful Bill Act (OBBBA) signed into law by President Donald Trump on July 4, 2025, will end the Biden-era SAVE repayment plan, introduce new borrowing limits for graduate students and parents, expand Pell Grants to short-term workforce training, and reshape Public Service Loan Forgiveness rules.
The End of the SAVE Plan
More than 7 million borrowers currently enrolled in the Saving on a Valuable Education (SAVE) plan face the most immediate disruption. The Biden-era income-driven repayment plan, which offered the most generous terms including $0 monthly payments for low-income borrowers, is being wound down after years of legal challenges that reached the U.S. Supreme Court.
Starting around July 1, loan servicers will begin notifying SAVE enrollees that they have approximately 90 days to select a new repayment plan. According to CBS News, if borrowers fail to act within that window, the Department of Education will automatically enroll them in the Standard Repayment Plan, one of the least flexible options available.
“If they do nothing in that 90-day period, then the loan servicer will automatically put them in the standard plan,” Sarah Austin, a policy analyst at the National Association of Student Financial Aid Administrators, told CBS News.
Financial aid experts have warned that this transition could exacerbate an already alarming rise in student loan defaults, particularly since many SAVE enrollees qualified for $0 monthly payments due to low incomes and will now face significantly higher costs.
New Repayment Plans: RAP and Tiered Standard
The OBBBA introduces two new repayment plans. The Repayment Assistance Plan (RAP) bases monthly payments on adjusted gross income, waives excess monthly interest, and includes a principal-matching payment for lower-income borrowers. Borrowers can also reduce their payment by $50 per month for each dependent. However, RAP requires 30 years of repayment before any remaining balance is forgiven.
The Tiered Standard Plan extends repayment periods based on total debt: 10 years for balances under $25,000, 15 years for $25,000-$49,999, 20 years for $50,000-$99,999, and 25 years for $100,000 or more.
Current borrowers with pre-July 1 loans who do not take out new loans can continue accessing existing plans, including Income-Based Repayment (IBR), Pay As You Earn (PAYE), and Income-Contingent Repayment (ICR). However, PAYE and ICR will be phased out by July 1, 2028.
Strict New Limits on Graduate Borrowing
Graduate students face dramatic changes. Previously able to borrow up to the full cost of their program, new graduate borrowers will now be capped at $20,500 per year with a total limit of $100,000. Only 11 categories of professional degrees — including law, medicine, dentistry, and veterinary medicine — qualify for higher limits of $50,000 per year and $200,000 total.
Notably, nursing and other healthcare fields have been excluded from the professional designation, sparking a 25-state lawsuit filed in May 2026. The American Nurses Association warned the rule could worsen healthcare shortages by making advanced nursing education financially inaccessible.
Education Secretary Linda McMahon has defended the caps, arguing they are designed to force colleges to lower tuition. “It is our overall goal to bring down the cost of college and education,” McMahon told a House committee hearing in May.
Parent PLUS and Pell Grant Changes
Parent PLUS loans face new annual caps of $20,000 per dependent child with a $65,000 aggregate limit — a significant reduction from the previous policy allowing borrowing up to full cost of attendance. New Parent PLUS borrowers will also lose access to income-driven repayment plans and Public Service Loan Forgiveness.
On a positive note, Pell Grants are being expanded to cover short-term workforce training programs lasting 8 to 15 weeks in fields such as nursing assistance, early childhood education, and automotive mechanics. The maximum Pell Grant for 2026-27 is $7,395, with prorated amounts for shorter programs. However, the program also tightens eligibility by closing the so-called “Pellionaire loophole” and restricting grants for students receiving other aid that covers full attendance costs.
PSLF and Legal Uncertainty
Public Service Loan Forgiveness remains available, with IBR, ICR, PAYE, and the new RAP all qualifying. However, a controversial new rule allows the Education Department to deny forgiveness to workers whose employers engage in activities with “substantial illegal purpose,” defined by the department as including “terrorism, child trafficking, and transgender procedures.” Boston, Chicago, and other cities sued over the rule in late 2025, and the legal fight continues.
What Borrowers Should Do Now
Experts urge all borrowers to take immediate action. Winston Berkman-Breen, legal director of the advocacy group Protect Borrowers, advises: “If you have not been paying attention to your loans for four, five, six years, totally understandable. But now is the time to make sure your contact information is up to date. Make sure you have your login with studentaid.gov.”
Borrowers can use the Education Department’s Loan Simulator to compare repayment options. With the 90-day clock for SAVE borrowers starting July 1 and multiple plans being phased out by 2028, the window for making informed choices is narrowing fast.
“These are the most changes we have seen at this scale in a very long time,” Austin said.