Neumeister: Student loan rules are changing

Federal student loans are about to look very different. Beginning July 1, 2026, a sweeping law known as the One Big Beautiful Bill Act will overhaul how students borrow for college and how millions repay their loans afterward. These changes will have ripple effects not only for borrowers, but also for employers competing for talent and professionals advising families on education and financial planning.

One of the most significant changes is a shrinking menu of repayment options. Today’s borrowers can choose from several income-driven repayment plans. Under the new law, most of those plans, including Pay As You Earn (PAYE) and Saving on a Valuable Education (SAVE), are being phased out. Future borrowers will choose between just two options: a redesigned standard repayment plan or a new income-driven option called the Repayment Assistance Plan (RAP).

RAP is designed to simplify payments and eliminate “negative amortization,” a long-standing problem where balances grow even while borrowers make payments. Monthly payments are tied to income, starting as low as $10, and the federal government will subsidize unpaid interest. But there’s a catch: forgiveness doesn’t arrive until after 30 years, longer than previous income driven plans.

Borrowing limits are also tightening, especially for graduate education. The law eliminates Grad PLUS loans, which previously allowed students to borrow the full cost of attendance. Going forward, most graduate students will be capped at $20,500 per year and $100,000 total, while only a narrow group of professional programs, such as medicine and law, qualify for higher limits of $50,000 per year and $200,000 total. This shift could push more students toward private loans or require families to rely more heavily on savings.

Parents are affected as well. Parent PLUS loans now carry firm caps and repayment options are more limited. Parents who don’t act in time to consolidate or switch plans could find themselves locked into higher, less flexible payments, an outcome advocates say could increase defaults among older borrowers. Parent Plus borrowers should consider consolidating loans by July 1, 2026. After that, you may need to apply for an Income-Contingent Repayment (ICR) plan and pay one monthly payment before switching to an Income-Based Repayment (IBR) plan by July 1, 2028.

There are important implications for employers, too. Public Service Loan Forgiveness (PSLF) remains available, and payments made under RAP will count toward forgiveness. However, new rules tighten eligibility for qualifying employers, excluding organizations engaged in certain illegal activities. Employers that rely on PSLF as a recruitment tool should pay close attention to the updated definitions.

Finally, there’s a tax surprise many borrowers may not expect. Temporary pandemic era rules made most forgiven student loan debt tax free, but that provision expired at the end of 2025. Under the new system, loan balances forgiven after 30 years under RAP will generally be taxable income, unless another exclusion applies.

The bottom line: this is one of the largest rewrites of the student loan system in decades. Families planning for college, employees managing repayment, and businesses advising their workforce should act early. The choices made before July 2026, and again before key transition deadlines in 2028, could have financial consequences lasting for decades.