One of the biggest federal student loan reforms in decades is coming July 1, experts said, and borrowers should start preparing now.
President Donald Trump’s signed tax and spending package passed last July made sweeping changes to the way families can borrow to pay for school. The changes include ending some repayment schemes, introducing new schemes and adding new loan limits among others.
Since there will be so many changes at once, experts are warning students to know about them now so that they can choose plans that best fit their budget. If borrowers enrolled in some of the schemes do not act, the Education Department (ED) will automatically enroll them in one of the new schemes to be launched on July 1.
“Go to studentaid.gov and look around and see what’s happening with repayment options and what’s available now,” said Jack Wallace, director of government and lender relations at student loan refinancing company Yrefy. “Do it now. Don’t wait until (July 1). You may qualify for something now that won’t be available until later.”
Which repayment plans are expiring?
On July 1, the ED said:
- SAVE (Savings on Valued Education): Borrowers still enrolled in the now discontinued SAVE scheme will be contacted by their loan service providers around July 1 to change to a new payment plan within 90 days. About 7.5 million borrowers were enrolled out of a total of about 50 million. Many are in forbearance, said Stacey McFetres, senior director of education finance at Bright Horizons, an educational advisory services provider.
- “Because the standard repayment plan typically leads to higher monthly payments, borrowers are strongly encouraged to explore and apply for other income-driven plans at studentaid.gov before the automatic deadline expires,” she said.
Note: Borrowers who are making monthly payments at SAVE and think they will take advantage of reduced payments by the end of the 90-day period need to know that “if they are eligible and want to progress toward PSLF (Public Service Loan Forgiveness) or income-driven (IDR) forgiveness, those payments will not count,” McFettress said. “Existing borrowers can immediately switch to IBR (Income-Based Repayment), which is also income-based and will allow payments to go toward PSLF and IDR forgiveness.”
- PAYE (Pay As You Earn): PAYE enrollment will be cut off for loans disbursed on or after July 1. Existing borrowers with loans disbursed before July can continue to use it and keep it, but the scheme will phase out completely by July 1, 2028.
- ICR (Income-Contingent Repayment): ICR will not be available for loans disbursed on or after July 1, and the scheme will be phased out completely by July 1, 2028.
- IBR (Income-Based Repayment): The existing IBR schemes are old and will remain active only for loans disbursed before July. The scheme will be closed for new enrollees on July 1.
- Parent Plus: These loans are not expiring, but parents with these loans must consolidate them into a Direct Consolidation Loan before July 1 to remain eligible for income-driven options and programs like PSLF. After July 1, Parent PLUS borrowers who have not consolidated permanently lose access to IDR plans and PSLF. They will be locked into standard payment plans, which could mean higher monthly payments without the possibility of forgiveness.
Which repayment plans will be available from July 1?
Only two repayment plans will be available to new borrowers from July 1:
- Standard Repayment Plan: The ED said the default standard plan features fixed monthly payments and lasts for 10 to 30 years, depending on the loan amount and whether it is a consolidation loan. “The monthly payments may be higher than other schemes, but the total interest paid is usually less and the repayment period is usually shorter,” ED said.
- Repayment Assistance Plan (RAP): An income-driven plan with payments between 1% and 10% of your adjusted gross income (or a flat $10 per month if your income is less than $10,000 per year). Balance waiver is available after 30 years of repayment.
Will loan changes be made?
The following loans will see changes from July 1:
- Graduate Plus: These loans will no longer be offered. If you are already borrowing under these loans, you may continue to borrow under the legacy, or uncapped, limit for up to three additional academic years, or until graduation or program completion, whichever comes first. At least one distribution of the grandfathered loan must occur before July 1. Experts said, possibly, a student could apply, get approved and deposit money in the account before July 1 and be eligible for the extension.
- Graduate Loans: New Direct unsubsidized loans for graduate students, or where the borrower is always responsible for paying the interest, capped at $20,500 ($100,000 total) annually for standard graduate programs and $50,000 ($200,000 total) for qualified professional programs such as medical, dental, and law degrees.
- Parent Plus: Loan limit will be $20,000 per student per year, with a lifetime limit of $65,000 per dependent, unless you already have one. Then, you can continue to borrow under the old limit for three school years or until you graduate, whichever comes first. Like the Grad Plus loan, parents can apply to be grandfathered in and have the first installment delivered to the school before July 1.
“A lot is changing, and you have to be aware of the changes and see if they affect you,” McFettress said.
Medora Lee is the money, markets and personal finance reporter at USA TODAY. You can reach him at (email protected) and subscribe to our free Daily Money newsletter for personal finance tips and business news every Monday to Friday.