One Big Beautiful Bill Act and student loan reforms

Congress passed the One Big Beautiful Bill Act (OBBBA) on July 4, 2025, enacting sweeping reforms impacting student loans, repayment plans, and forgiveness programs. These changes affect millions of borrowers, especially those enrolled in income-driven plans, pursuing public service, or planning graduate school financing.

Here are the key takeaways:

Repayment options: Starting July 1, 2026, the federal student loan system will be streamlined down to just two repayment options: a standard fixed-term plan (10-25 years depending on loan size), or a new income-based Repayment Assistance Plan (RAP) that caps payments at 1-10% of income, includes a $10 minimum monthly payment, and extends forgiveness to 30 years. Key programs like SAVE, PAYE, and ICR will be phased out by July 1, 2028, and borrowers currently enrolled in those plans must transition to either the Revised Standard Repayment Plan or the Repayment Assistance Plan (RAP). While RAP may benefit some low-income borrowers, many will likely see higher monthly payments, longer repayment periods, and less flexibility than under existing income-driven plans.

Public Service Loan Forgiveness: Under the new rules in the OBBBA, RAP will be one of the few repayment options eligible for Public Service Loan Forgiveness (PSLF) starting July 2026. Borrowers working in qualifying public service jobs can count their RAP payments toward the 120 payments required for PSLF. However, because RAP payments are set as a percentage of income over a longer 30-year term, many borrowers may make higher cumulative payments before reaching forgiveness, compared to today’s SAVE plan.

Graduate PLUS loans and borrowing limits: The Grad PLUS loan program, which previously allowed graduate and professional students to borrow up to the full cost of attendance, will be eliminated for new borrowers in July 2026. Instead, borrowing for graduate programs will now be capped at $20,500 per year, with a $100,000 lifetime cap, and for professional programs, such as law and medicine, $50,000 annually and $200,000 lifetime. A $257,500 lifetime limit applies across all federal student loans, excluding Parent PLUS. For students already using Grad PLUS before the cut-off date, existing loans and borrowing rights continue through up to three additional years or until program completion, whichever is shorter.

Parent PLUS loans: Starting in July 2026, parents will no longer be able to borrow up to the full cost of their child’s education. Instead, loans will be capped at $20,000 per year, with a $65,000 lifetime maximum per child. Repayment options are also changing. New loans won’t qualify for the current income-driven repayment plans and will need to be paid back either through a set monthly payment plan or a new income-based option that stretches payments over 30 years. Parents with existing loans may still have a chance to consolidate and keep flexible repayment choices.

Forgiveness tax treatment: The tax exemption on student loan forgiveness under the American Rescue Plan expires on December 31, 2025. Starting in 2026, most student loan forgiveness, including residual balances after completing an income-driven repayment plan like IBR or the new RAP, will once again be considered taxable income. This means forgiven debt will generate a Form 1099-C and count as taxable income unless it’s forgiven due to PSLF, or because of the borrower’s total and permanent disability or death, which remain the only federal exclusions.

Financial planning implications:

Monthly payments may rise. With SAVE and other similar programs being eliminated, most borrowers will likely see higher monthly payment obligations.
Longer forgiveness timeline. RAP’s 30-year forgiveness window creates a longer horizon for debt clearance.
Tax headaches ahead. Borrowers expecting forgiven balances in 2026 and beyond must prepare for a potential taxable event, possibly increasing tax liability by thousands of dollars.
Caps limit future borrowing flexibility. Graduate students and parents will face strict annual and lifetime ceilings. Those planning for professional degrees must model financing carefully or consider private alternatives.
PSLF eligibility risks. Though RAP counts toward PSLF, concurrent enforcement changes may disqualify certain nonprofits or employers. Borrowers should confirm that employers remain PSLF-eligible and monitor guidance from servicers.

The OBBBA ushers in a host of high-impact changes for student loan borrowers. Borrowers should act proactively by reviewing current plans, modeling impacts, and updating financial strategies sooner rather than later. If you would like help figuring out how the OBBBA student loans overhaul may affect your financial plan, don’t hesitate to reach out.

Disclaimer: This material is for informational purposes only and should not be considered financial, tax, or legal advice. Always consult with a qualified professional regarding your specific situation. All investment strategies involve risk, and there is no assurance that any strategy will achieve its intended results.

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