For many years, it seemed as though a court decision or a change in policy would bring about another change to the federal student loan system. Programs for forgiveness came and went. Repayment restarts arrived after a delay. Borrowers learned to be cautious about their plans. However, as of July 1, the changes are official and genuine, no longer merely hypothetical.
Approximately 7 million participants in the Biden-era income-driven repayment program, the SAVE plan, which was already on shaky legal ground, will suffer the most immediate disruption. Now that it is being phased out, the Department of Education will start informing those borrowers that they have ninety days to switch to a different repayment plan. That window seems generous until you consider the number of people who either don’t understand what they’re being asked to decide or fail to receive notices from their loan servicer.
Those who remain undecided will not remain in a state of uncertainty. They will automatically switch to a standard repayment plan, which is usually less flexible and may be much more expensive each month for borrowers with large balances compared to their income. A policy change where inaction has such a direct financial impact is unsettling.
The menu of repayment options for new borrowers entering the federal loan system after July 1 will be much simpler. This may seem like a good thing until you read the fine print. The majority of new borrowers will essentially choose between the Tiered Standard repayment plan, which can last up to 25 years, and the Repayment Assistance Plan, or RAP, which links monthly payments to adjusted gross income, rather than a variety of income-driven plans based on various income thresholds and forgiveness timelines. Advocates for student loans have been quite straightforward about the issue: many borrowers’ RAP payments will exceed their SAVE payments.
These changes may be most noticeable to graduate students. New borrowers are no longer eligible for Graduate PLUS loans as of this week. Hard borrowing caps take their place: $200,000 for professional degrees in disciplines like law and medicine, and $100,000 lifetime for most graduate programs. Students could basically borrow up to the cost of their program prior to these restrictions. The difference between what federal loans can currently cover and what tuition actually costs could easily reach six figures for someone attending a private medical school. These caps are expected to put pressure on institutions to reevaluate their pricing, at least according to the Department of Education’s stated stance. It’s unclear if that truly occurs or if students just use private loans to make up the difference.
Additionally, parents utilizing Parent PLUS loans are negotiating unfamiliar territory. In the past, after other aid was applied, qualified parents could borrow up to the entire remaining cost of attendance. Currently, each student’s lifetime borrowing limit is capped at $65,000. Compared to a four-year bill, that figure may seem insignificant to families attending more expensive schools.
Beneath the changes is a small but noteworthy incentive. A two-year interest rate reduction of one percentage point will be granted to borrowers who set up automatic payments, starting on July 1. Although it’s a small incentive, even that decrease adds up over time for borrowers with limited monthly budgets.
Observing all of this, it is evident that borrowers will need to participate more actively in the upcoming months than the system has in the past. Maintaining copies of your loan documents, checking your repayment plan, and updating your servicer’s contact information are now actually essential actions rather than merely bureaucratic recommendations. It’s not exactly a broken system. However, things have changed, and it makes sense to assume that nothing applies to you in order to get worse off.
