The federal student loan system is undergoing significant changes, including the proposed termination of the Saving on a Valuable Education (SAVE) repayment plan, the introduction of new repayment options, revised borrowing limits for graduate students and parents, and adjustments to Public Service Loan Forgiveness (PSLF) qualifications. These reforms, largely effective in 2026, coincide with the resumption of wage garnishment for defaulted borrowers and come amidst reported high rates of borrower delinquency. The U.S. Department of Education has also faced scrutiny regarding reduced oversight of loan servicers during this transition period.
Proposed Termination of SAVE Plan
The U.S. Department of Education announced a proposed settlement agreement in early December to conclude the Saving on a Valuable Education (SAVE) student loan repayment plan. The SAVE plan was an income-driven repayment option that offered loan forgiveness provisions and monthly payments, some as low as $0 for qualifying low-income borrowers.
Advocacy groups like Protect Borrowers described the plan as "the most affordable, generous, and flexible."
The plan faced legal challenges from Republican state attorneys general, led by Missouri, who filed lawsuits alleging that the administration exceeded its authority and that the program's provisions were "excessively generous." Legal proceedings resulted in payment pauses for SAVE borrowers, though interest began accruing in August.
Under Secretary of Education Nicholas Kent stated:
"American taxpayers can now rest assured they will no longer be forced to serve as collateral for illegal and irresponsible student loan policies" and that "the law is clear: if you take out a loan, you must pay it back."
Subject to court approval, the proposed settlement includes the cessation of new borrower enrollments in SAVE, the denial of all pending SAVE applications, and the transition of approximately 7 million borrowers currently enrolled in SAVE to alternative repayment plans. Borrowers will be required to select a new repayment plan, which will consist of fixed payment plans or other income-based repayment plans, within a specified, limited timeframe.
Experts like Betsy Mayotte of the Institute of Student Loan Advisors (TISLA) noted that this change places borrowers who made financial decisions based on the SAVE plan in a challenging position, as such a plan has not previously been withdrawn from existing borrowers. Persis Yu of Protect Borrowers commented that the settlement "is going to make life much more expensive" for borrowers. Scott Buchanan, head of the Student Loan Servicing Alliance, indicated that the transition process for millions of borrowers is anticipated to present significant operational challenges for loan servicing companies, noting it "is gonna be bumpy" and borrowers "will need a ton of hand-holding."
New and Revised Repayment Plans
Legislation, referred to as the 'One Big Beautiful Bill Act' (OBBBA), will gradually phase out two other income-driven repayment plans, Income-Contingent Repayment (ICR) and Pay As You Earn (PAYE), with their termination set for mid-2028. Income-Based Repayment (IBR) will remain an available option.
The OBBBA also introduces two new repayment plans for new borrowers, effective July 1, 2026, which will replace most existing options:
- The Standard Plan: This plan offers a repayment window of 10 to 25 years, contingent on the debt amount. Payments will be divided into equal monthly installments, including interest, with larger debts qualifying for longer repayment periods.
- The Repayment Assistance Plan (RAP): Designed for borrowers with lower incomes, RAP primarily bases payments on adjusted gross income (AGI). The Department of Education will waive any interest remaining after a borrower's monthly payment, aiming to prevent loan balances from increasing. For monthly payments under $50, the government will match the payment and apply it toward the principal. Forgiveness of remaining debts under RAP is extended to 30 years, an increase from the 20-25 years offered by some other plans. Analysis by Preston Cooper of the American Enterprise Institute (AEI) suggests that typical borrowers may repay their loans before reaching the 30-year mark.
Existing SAVE borrowers are expected to transition to new plans prior to July 2026, accelerating the original OBBBA deadline of July 1, 2028, for borrowers to change plans.
Changes to Public Service Loan Forgiveness (PSLF)
The Public Service Loan Forgiveness (PSLF) program provides a path for public service workers, including those in teaching, nursing, and policing, to have their federal student loan balances forgiven after 10 years of qualifying payments. Borrowers enrolled in the SAVE plan experienced delays in their progress toward PSLF qualification due to payment freezes.
While Congress established PSLF, preventing its outright elimination by the administration, rule changes have been introduced. Effective July 1, 2026, the Education Department states it will deny loan forgiveness to workers whose government or nonprofit employers engage in activities with a "substantial illegal purpose," a definition to be determined by the education secretary. In November, the cities of Boston, Chicago, San Francisco, and Albuquerque, N.M., filed a lawsuit against the administration regarding these PSLF changes, asserting that the policy could exclude public workers from forgiveness based on local government actions.
New Borrowing Limits
New borrowing limits for federal student loans will apply to graduate students and parents starting July 1, 2026, while undergraduate limits remain unchanged. The current graduate PLUS program, which allowed students to borrow up to the full cost of their degree, is being eliminated.
- Graduate student borrowing will be capped at $20,500 per year.
- Borrowers pursuing professional graduate degrees (e.g., medicine, law) will have an annual cap of $50,000.
- Parents and caregivers utilizing parent PLUS loans will face a cap of $65,000 per child.
Preston Cooper of AEI commented that the previous system, where colleges could raise prices and the government would fund it through PLUS loans, was unsustainable. Persis Yu of Protect Borrowers suggested that these caps may compel students to seek alternative funding, potentially turning to the private student loan market, and Betsy Mayotte believes some schools may discontinue certain degree programs.
Resumption of Wage Garnishment and Delinquency Trends
The U.S. Education Department has confirmed that wage garnishment for federal student loan borrowers in default will recommence in early 2026, following a multi-year pause implemented during the pandemic. Notices are expected to be sent to approximately 1,000 defaulted borrowers starting the week of January 7, 2026, with a projected monthly increase throughout that year.
A borrower is classified as being in default when federal student loan payments have not been made for more than 270 days. Upon default, the federal government possesses the authority to pursue debt collection through seizing tax refunds, seizing Social Security benefits, or ordering employers to withhold up to 15% of a borrower's pay. Borrowers are scheduled to receive a 30-day notification prior to the commencement of wage garnishment. Betsy Mayotte observed that the resumption of garnishment will coincide with anticipated increases in Affordable Care Act health insurance premiums in 2026, potentially exerting economic pressure on low- and middle-income borrowers.
Current federal student loan data, according to an analysis by the American Enterprise Institute (AEI), indicates significant challenges for borrowers:
- Approximately 5.5 million borrowers are currently in default.
- An additional 3.7 million borrowers are more than 270 days late on their payments.
- 2.7 million borrowers are in the early stages of delinquency.
This totals approximately 12 million borrowers, representing over 25% of federal student loan recipients, who are either delinquent or in default. Experts, including Persis Yu of Protect Borrowers and Betsy Mayotte of TISLA, express concern regarding a potential increase in default rates.
Oversight Concerns
A report from the U.S. Government Accountability Office (GAO) found that the U.S. Department of Education ceased key oversight functions for federal student loan servicers over a year ago. In February 2025, the Office of Federal Student Aid (FSA) stopped reviewing the accuracy of loan servicers' records and recordings of borrower calls. The GAO report indicates this lack of oversight could lead to borrowers being placed in incorrect repayment statuses, billed inaccurately, or experiencing delayed refund processing.
FSA officials informed the GAO that these reviews were halted due to a "lack of FSA staff capacity," coinciding with a a 46% staff reduction at the Education Department in 2025. Richard Lucas, FSA's acting chief operating officer, acknowledged the suspension of reviews but disagreed with GAO's recommendation to resume them, stating FSA utilizes other activities, such as borrower satisfaction surveys, for oversight.
Melissa Emrey-Arras, who led the GAO study, stated that satisfaction surveys do not directly assess the quality of information provided to borrowers.
Prior to the oversight reduction, a GAO review at the end of 2024 revealed that four of five servicers failed accuracy performance standards, with two receiving maximum financial penalties. Additionally, the Education Department's financial auditor reported in January 2026 a "material weakness related to the reliability of its student loan data." The GAO warned that reduced oversight also impacts financial accountability for servicers, potentially leading to overpayments for poor performance. The scaling back of oversight occurs as millions of federal student loan borrowers face transitions into new repayment plans. Scott Buchanan of the Student Loan Servicing Alliance indicated that servicers conduct extensive internal monitoring due to contractual obligations to correct errors.