Unpacking All of the New Student Loan Changes

Unpacking All the New Student Loan Changes

Any student or family planning to take out federal loans to pay for college needs to be aware that there are huge changes to how much can be borrowed and how repayment will work.

The big federal tax bill signed into law in July limits how much parents can borrow for a child’s undergrad degree, and income-based repayment plans are less generous for student borrowers. The bottom line is that paying for college just got more complicated.

Let’s start with a list of the new rules, and then I will share my advice on how to plan for college in light of these new rules.

UNDERGRADUATE BORROWING

• Beginning July 1, 2026, the Parent PLUS loan program limits parental borrowing to $20,000 per year per student and a lifetime total per student of $65,000. Under the old rules, parents could borrow up to the full cost of attendance.

• Parent PLUS loans taken out after July 1, 2026, will no longer be eligible for an income-driven repayment plan. Parent Plus loans will only be eligible for the standard repayment plan, which sets repayment between 10 and 25 years depending on the balance.

• Beginning July 1, 2026, students borrowing for their undergrad education will have their interest payments during school added to their loan balance. In the past, qualifying undergrad students were able to get “subsidized” federal loans that did not charge interest while the student was in school. The new law makes all undergrad loans “unsubsidized.” In plain English, that means that even though students do not have to make payments on their loans while they are in school, the interest on the loan is charged, and if unpaid while in school, the interest charged is added to the loan balance. That will mean bigger payments once the student leaves school and repayment starts.

• The annual borrowing limits for federal student undergraduate loans are unchanged. They start at $5,500 for the first year, $6,500 for year two, and $7,500 for year three and beyond. There is a lifetime limit of $31,000 for students who are claimed as a dependent on a parent’s tax return. Limits for independent students are higher.

• Repayment of student loans taken out after July 1, 2026, will be eligible for two basic repayment plans:

A standard plan that will require the loan to be paid off in 10-25 years, depending on loan size.

There will be just one income-driven plan, called the Repayment Assistance Plan (RAP), that will tie payments to income; payments will range from 1% to 10% of discretionary income, and there will be no $0 payment options. Under RAP, a loan will be forgiven after 30 years, which is five years longer than the old plans. (Note: for borrowers on an IDR plan taken out before July 2026, you will still need to switch to one of these two new plans after July 2028.)

• Beginning July 1, 2027 (not 2026), deferment of a federal loan due to economic hardship is ended. There will be no way to completely defer principal and interest payments due to hardship. (Note: you can still defer payments while in school. This new rule applies only once you have left school and are in the repayment phase.)

• Beginning July 1, 2027, you will still be able to apply for repayment forbearance, but if granted, it will only be allowed for 9 months within any 2-year period. With forbearance, you do not owe any payments, but the interest on the loan continues to accrue and is added to your loan balance.

GRADUATE BORROWING

• Beginning July 1, 2026 the Graduate PLUS program is abolished. Under this program, graduate students have been able to borrow up to the full cost of attendance. There are now limits on how much a graduate student can borrow:

Beginning July 1, 2026, the only remaining program for federal graduate school borrowing will be Unsubsidized loans for graduate school. The annual limit for master's programs and Ph.D programs will be $20,500 a year, and there will be a lifetime limit of $100,000. For professional degrees (doctor, lawyer), federal borrowing will be limited to $50,000 a year and $200,000 total.

The new grad school lifetime limits are in addition to any federal undergraduate borrowing.

My advice for undergrad debt: I have long advised parents not to put their retirement at risk by borrowing, or overborrowing for their children’s college costs. But I also know that this has been a challenge for many families. These new limits provide some guardrails that can help nudge more of you to carefully calibrate college borrowing for children. The same rule still applies: children should always borrow first. The interest rate they pay on federal loans is lower than the cost of Parent PLUS loans.

And more importantly, the new borrowing limits should spark your family to double down on looking for the best affordable school. The dream school is the one that is so eager for your child to attend that it will offer a great merit-add package that reduces (or even eliminates) the need for your kid to borrow (let alone you).

As for the change in repayment plans: well, the big takeaway is that students and parents really need to think hard about what they will owe after school is over. Because repayment plans are less generous, and forbearance is limited, you need to be prepared to make on-time payments once the student leaves school. The worst thing you can do is borrow now without understanding your future repayment commitment.

Notice I said “leaves school.” Loans must be repaid regardless of whether the student graduates or not. That’s just another reason to have serious family talks long before freshman year about attending college and paying for college. The worst move is to force a child into an education they aren’t eager or ready for, because they (and maybe you) still end up paying for it even if they don’t complete a degree.

My advice for grad school: The majority of recent borrowers for a master’s degree borrowed less than $100,000, so I am not too concerned about this new federal loan limit. You should be able to fulfill any borrowing needs by sticking with federal loans. Professional degrees are another matter. The cost of obtaining a medical degree or law degree often exceeds $200,000.

Under the new rules, anyone who needs to borrow more for their graduate degree will need to look for private student loans. And that is a big stand-in-your-truth moment. Please slow down and carefully—very carefully—understand the risks and requirements of a private student loan.

For starters, private student loans work a bit like a car loan: you need to qualify, and that means a credit score check. Even if you are approved, the interest rate you are offered (private loans can be fixed or variable rate) will be set based on your credit profile. Another option is for someone else (typically a parent with income) to cosign.

For the parents reading this, please do not tell me (and more importantly, yourself) that cosigning is no big deal, given that it is for such a worthy endeavor. What if your child doesn’t finish the degree? Or if the child’s income is not sufficient to cover hefty repayments? You will be on the hook to make payments. If that in any way interferes with your retirement security, you get a hard Denied! from me. It’s also important to understand that private loans do not offer the same repayment terms and protection as federal loans.

That doesn’t mean your child can’t become a doctor or lawyer. It does mean that they should look for programs that will subsidize the cost. I am going to repeat this crucial advice: The “best” school, whether we are talking about someone pursuing an undergrad, master’s, or professional degree, is the program that offers the best financial aid. Ideally, you would never need to take out private loans. At a minimum, if you do need private loans, it should be for the smallest amount possible.