Major Changes Coming To Federal Student Loans After Reconciliation Bill

Late in the afternoon of Thursday, July 3, the House voted to pass the budget reconciliation bill, a package intended to make extensive cuts to taxes and overhaul government spending. President Donald Trump signed the bill into law on July 4, 2025, meeting his self-imposed deadline.

With the bill’s passing, major changes are coming to the federal student loan program that will make it harder for students to finance their education and current student debtors to afford their payments. The bill comes at a time when millions are already falling delinquent on their federal student loan payments, according to a recent TransUnion analysis. 

Reconciliation bill passes with major changes to federal student loan program

Experts argue that changes introduced by the reconciliation bill will make it harder for students to afford a higher education. However, borrowers now know the nature of the changes and can plan accordingly.

“Now that we have rules, we can now operate inside those rules to optimize moving forward,” says Stanley Tate, a student loan lawyer at Tate Esq. LLC. “Yeah, it’s bad. But at least there are rules to work inside of and [we can] adjust our options accordingly, and take what’s most optimal for us.”

The changes likely to have the biggest impact on student loan borrowers will be those made to repayment programs, borrowing limits and hardship assistance. 

Changes to income-driven repayment plans

The bill discontinued the graduated repayment plan, as well as the income-based repayment (IBR), pay as you earn (PAYE), income contingent (ICR) and Saving on a Valuable Education (SAVE) income-driven plans. Student loans taken out after July 1, 2026 will have only two repayment options: the standard plan and the income-based repayment assistance plan (IRAP).

Those currently in a discontinued repayment program will need to change plans by July 1, 2028 and may have access to the standard, IRAP and IBR plans.

Student loan borrowing limits

In addition to new graduate and parent loan limits, there is also a lifetime cap of $257,500 (excluding parent PLUS loans) for all federal student loans taken out by an individual student. Previously, borrowers could take out up to the cost of attendance in graduate PLUS loans.

Students currently enrolled in a program and already borrowing money can use the old limits throughout the rest of their studies. 

Limited hardship assistance

The bill eliminated a borrower’s ability to defer their student loans due to economic hardship or unemployment, starting with loans taken out in July 2025. Student loan borrowers may still enter into forbearance, but they can only pause payments for up to nine months during a 24-month period. Student loan deferment and forbearance both pause loan payments; however, interest still accrues in forbearance, so you will owe more than you did before pausing payments.

What this means for borrowers

“While I understand the need to curb the cost of higher ed — and this is one way to do that — this is really dropping a nuclear bomb on the system, and then having people adjust from there,” says Tate. 

And how you’ll need to adjust depends on the type of borrower you are and where you’re at in the student loan journey.

Current borrowers in repayment

According to Tate, the biggest takeaway for those in repayment is that you have one of three repayment options: Standard plan, IBR or IRAP. You have until 2028 to switch to one of these plans if you are in any of the discontinued plans. If you do not act, you’ll be automatically placed into the standard repayment plan. With fixed monthly payments for 10 years (or up to 30 if you consolidate your student loans), this plan may come with the highest payment.  

If you’re already doing income-driven repayment, you likely prioritize working toward forgiveness and trying to pay as little as possible. Tate recommends avoiding the standard repayment plan and carefully weighing the two remaining options — IBR and IRAP. According to Tate, IRAP may seem like a good option for some borrowers, but it has issues.

“[IRAP] sounds good up front. But then it comes with all these terms and conditions on the back end to actually make it much more cost-prohibitive in the long run. You can’t switch out of it. … They’re defining family size differently. And so it’s just not as flexible as an option as IBR,” he says.

Future borrowers

“You’re going to have to pay much more attention to your return on investment,” warns Tate, “and maybe pay much more attention to the total cost of your education.”

That’s because these changes affect new borrowers most. Any new loans taken out after July 2026 will only have two repayment options: the standard repayment plan and the IRAP. You’ll also have a limit on how much you can borrow in federal student loans, with graduate loans limited to $100,000 total ($200,000 for professional programs). Grad PLUS loans, which provided up to the full cost of attendance, have been eliminated. 

With many graduate programs costing close to $50,000 a year, these changes may require some students to turn to private lenders. And while private student loan interest rates can be lower, you may need a cosigner to get a private loan. These types of loans also don’t typically have income-driven repayment options and loan forgiveness programs like federal loans do. 

“If you’re dealing with a hard cap on your education, I think it makes much more sense to pay as little as possible for your undergraduate education to leave as much room as possible for your graduate education,” says Tate, who predicts an uptick in the number of students starting in community college, then transferring to state schools. 

This strategy could free up more federal loan money for students’ graduation education.

Of the four main ways to pay for college (federal student loans, private student loans, scholarships and grants, and paying out-of-pocket) Tate recommends borrowers focusing most on scholarships and grants. He even suggests hiring a coach or advisor to help find that free money. 

Parent loan borrowers

The bill also limits the amount you can borrow for your student’s education. Once lending up to the full cost of tuition, parent PLUS loans now have a limit of $20,000 per child annually, and a lifetime cap of $65,000 per child. 

Parents who take out parent PLUS loans after July 2026 will not have access to income-driven repayment programs or public service loan forgiveness. The bill allows parent PLUS borrowers one year to consolidate their loans and enroll in ICR, the only income-driven repayment plan available to parent borrowers. Once enrolled, you’ll eventually transition into the IBR plan. If you miss the deadline, you will not be able to access any income-driven repayment plan. 

All borrowers:

While you didn’t choose these new rules, you can choose the next steps you take to set yourself up for success. 

“There are going to be options moving forward. We just need to find the best [ones] inside of this less-than-desirable platter of options and say, ‘What’s best for me and my family moving forward?’” says Tate. “And I still think there’s a path forward for that.”

Planning now can help borrowers avoid several issues, including struggling to make payments — something nearly one in three borrowers are facing today.

Millions delinquent on federal student loans, even those who can make payments

A record number of federal student loan borrowers are delinquent on their student loan payments, according to a new analysis by credit reporting agency Transunion. As of April 2025, 31 percent of borrowers who should be paying on their loans are 90 or more days past due — the highest figure in recorded history. Additionally, another 4.5 million borrowers are 1 to 89 days late and on the path to delinquency, according to Joshua Turnbull, senior vice president and head of consumer lending at TransUnion. 

Those numbers are staggering, but what Turnbull finds most surprising from the study is the number of late-paying or delinquent borrowers who seemingly could make their student loan payments. 

The analysis found that of those borrowers who were newly delinquent or defaulted between December 2024 and March 2025, almost a quarter (22 percent) had VantageScores ranging from 661 to 850 before becoming delinquent. High credit scores indicate a history of on-time payments, so they should indicate an ability to make payments.  About nine percent of all delinquent accounts were cured and, looking at people with a prime credit score or higher, more than 20 percent cured their delinquency by April. 

When it comes to those who are 1 to 89 days late, about three million have a prime or better credit score and about one-third are paying at least $1,000 more than what they owe every month on their existing debt, according to Turnbull. This shows that many borrowers on the verge of delinquency actually can afford their student loan payments.

“These are people who have the capacity to pay and, for whatever reason … are on the path to delinquency,” he says. “It’s both surprising and incredibly unfortunate because that 90-day delinquency has incredibly serious effects on your ability to access credit in the short term.”

According to the analysis, the average credit score dropped more than 60 points following student loan delinquency. Superprime borrowers felt it the most, losing 174 points on average, according to Turnbull. 

As discussed, 22 percent of borrowers had a credit score of 661 or higher prior to delinquency. But after becoming 90 days delinquent, only two percent still had scores above 661. That means nearly all credit scores fell into the near-prime or subprime ranges following delinquency. 

With scores below prime (661 and higher), consumers will have a harder time qualifying for mortgages, auto loans and personal loans. They may also find it harder to obtain a credit card. If they do qualify for a loan, they’ll likely be charged some of the highest interest rates and have some of the least favorable terms.

What this means for borrowers

There isn’t one reason millions of people are delinquent on their federal loans. Some borrowers may simply not know they have to pay. After a five-year payment pause, student loans may be an afterthought or their contact information has changed, and they aren’t getting notifications. Some may be having difficulty navigating the confusing landscape of student loans, not knowing how or who to pay. 

Younger borrowers who graduated into the payment pause have never had a payment before — it can definitely be an adjustment. Others may be struggling to make payments as inflation has increased the cost of living. 

If you or someone you know is delinquent or on the path toward delinquency, these tips can help:

Know your student loan information: Sign on to StudentAid.gov with your FSA ID to get all your federal loan information, including who your servicer is, how much you owe, your interest rate, the repayment plan you’re enrolled in and if you currently have a payment due. You can also review your original loan paperwork.

Update your contact information: Check your personal and contact information in your StudentAid.gov account settings to make sure everything is up-to-date. That includes all of your contact information (email, mailing address and phone number) as well as your name, if that has changed since taking out your loans. This ensures you receive notices about past-due payments.

Contact your servicer: Once you know who your servicer is, reach out to them with questions about your loan, how to make payments and any assistance they may offer if you’re struggling to make your payments. 

Review your options: Along with your servicer, the Department of Education (ED), which handles the federal student loan portfolio, also has options for borrowers. This includes income-driven repayment plans, public service loan forgiveness and other forgiveness programs and hardship assistance. If you’re in default, visit the ED’s debt resolution page for more information. 

You could also consolidate student loans into one loan, with one interest rate and one payment to help you better manage your debt. If you also have private student loans and don’t plan on using the benefits that come with federal loans, you could consider refinancing your student loans. 

Seek assistance from other sources: If you’re overwhelmed by your student loans or need help navigating repayment, consult a financial advisor, student loan attorney or non-profits focused on helping those in debt. 

Missed student loan payments can negatively affect your finances and hinder your future life goals, but there are ways to get back on track. 

“[Delinquency] has a pretty profound impact on your credit score and your ability to access credit,” says Turnbull. “Talk to your servicer, make a plan — particularly if you have capacity — to avoid that outcome. If you find yourself in that crowd, be proactive. If you know someone in that crowd, encourage them to be proactive.”

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