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Federal Student Loan System Overhaul: SAVE Plan Ends, New Borrowing Limits and Repayment Options Take Effect

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The New Landscape of Federal Student Loans: What Borrowers Need to Know

The U.S. federal student loan system is undergoing a seismic shift. From the termination of the SAVE repayment plan to new borrowing caps and the launch of two new repayment plans, millions of borrowers face a complex and rapidly changing landscape. These changes stem from the "One Big Beautiful Bill Act" and a proposed settlement agreement resolving legal challenges against SAVE. Approximately 12 million borrowers are currently reported as delinquent or in default.

SAVE Plan Termination

Background

The SAVE plan was an income-driven repayment (IDR) option that offered monthly payments as low as $0 for qualifying low-income borrowers and included provisions for loan forgiveness. The plan faced legal challenges from Republican state attorneys general, led by Missouri, who argued that the program's provisions exceeded the administration's legal authority.

Legal Proceedings

The legal challenge resulted in a period during which SAVE borrowers were not required to make loan payments. Interest accrual on SAVE loans resumed in August. In early December, the U.S. Department of Education announced a proposed settlement agreement to resolve these legal disputes by discontinuing the SAVE plan. The settlement requires court approval.

Under Secretary of Education Nicholas Kent stated:

"The law is clear: if you take out a loan, you must pay it back... American taxpayers can now rest assured they will no longer be forced to serve as collateral for illegal and irresponsible student loan policies."

Transition for Borrowers

Under the proposed settlement, the Department of Education will:

  • Cease new borrower enrollments in SAVE.
  • Deny all pending SAVE applications.
  • Transition approximately 7 million borrowers currently enrolled in SAVE to alternative repayment plans.

Borrowers will receive a notice from their loan servicer and have a limited timeframe (approximately 90 days) to select a new repayment plan. If no action is taken, the Department of Education will enroll them in a plan. Available options include fixed payment plans and income-based repayment plans.

New Repayment Plans (Effective July 1, 2026)

Two new repayment plans, established under the "One Big Beautiful Bill Act," will replace most existing options for new borrowers:

The Tiered Standard Plan

  • Repayment periods range from 10 to 25 years, contingent on total debt amount.
  • Payments are divided into equal monthly installments, including interest.

The Repayment Assistance Plan (RAP)

  • Payments are based on adjusted gross income (AGI).
  • The department will waive any interest remaining after a borrower's monthly payment, preventing loan balance increases.
  • For monthly payments under $50, the government will match the payment and apply it toward the principal.
  • Forgiveness of remaining debts is extended to 30 years.

Phase-Out of Existing Plans

Income-Contingent Repayment (ICR) and Pay As You Earn (PAYE) will be phased out by July 1, 2028, though current borrowers can still enroll in these plans temporarily. Income-Based Repayment (IBR) remains an available option.

New Borrowing Limits (Effective July 1, 2026)

Graduate Students

  • Annual loan limit: $20,500; aggregate limit: $100,000.
  • The Grad PLUS program, which previously allowed unlimited borrowing to cover full cost of attendance, is eliminated.
  • Professional degrees (11 categories, including medicine and law): up to $50,000 per year, $200,000 total.
  • Current graduate students (enrolled before June 30, 2026) may be exempt if they maintain continuous enrollment, allowing borrowing up to cost of attendance for up to 3 academic years or remaining program length, whichever is less.

Parent PLUS Borrowers

  • New loans: capped at $20,000 per year per dependent, $65,000 aggregate.
  • Repayment only via Tiered Standard Plan; no income-driven plans or PSLF eligibility.
  • Existing loans (pre-July 1) : may consolidate and switch to IBR via a specific process.

Undergraduate Borrowers

  • Lending limits remain unchanged: $5,500 to $12,500 per year, up to $31,000 (dependent) or $57,500 (independent).
  • Repayment options: Repayment Assistance Plan or Tiered Standard Plan.

Public Service Loan Forgiveness (PSLF)

PSLF remains available for qualifying public service workers. Qualifying repayment plans include IBR, ICR, PAYE, and RAP.

New Rule

Effective July 1, 2026, the Department of Education can deny forgiveness if the employer engages in activities with a "substantial illegal purpose," defined as terrorism, child trafficking, and transgender procedures causing irreversible harm to children.

Litigation

In November, the cities of Boston, Chicago, San Francisco, and Albuquerque, N.M., filed a lawsuit challenging these PSLF changes. The complaint asserts that the policy could exclude public workers from forgiveness based on local government actions.

Short-Term Workforce Training Programs

Pell Grants have been expanded to cover short-term training (8-15 weeks) for low-income students. The maximum Pell Grant for 2026-27 is $7,395 (prorated for short-term programs). Eligibility requires FAFSA completion. Many programs may not yet qualify due to new federal rules.

Wage Garnishment Resumption

The U.S. Education Department has confirmed that wage garnishment for borrowers in default will recommence in early 2026. Notices are expected to be sent to approximately 1,000 defaulted borrowers starting the week of January 7, 2026. The department projects a monthly increase in the number of wage garnishment notices throughout 2026.

A borrower is classified as being in default when 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.
  • Ordering employers to withhold up to 15% of a borrower's pay.

Borrowers are scheduled to receive a 30-day notification before wage garnishment commences.

Reduced Federal Oversight

A report from the U.S. Government Accountability Office (GAO) found that in February 2025, the Office of Federal Student Aid (FSA) stopped reviewing the accuracy of loan servicers' records and recordings of borrower calls. FSA officials cited a "lack of FSA staff capacity," coinciding with a 46% staff reduction at the Education Department in 2025.

The GAO report warns that reduced oversight could lead to borrowers being placed in incorrect repayment statuses, billed inaccurately, or experiencing delayed refund processing. A prior GAO review at the end of 2024 revealed that four of five servicers failed accuracy performance standards, with two receiving maximum financial penalties.

Borrowing Statistics and Delinquency Data

  • 43 million Americans hold $1.7 trillion in federal student loan debt.
  • 5.5 million borrowers are currently in default.
  • 3.7 million borrowers are over 270 days late on payments.
  • 2.7 million borrowers are in early stages of delinquency.
  • Total: approximately 12 million borrowers (over 25% of federal student loan borrowers) who are either delinquent or in default.

Expert Commentary on Potential Impact

Economists and analysts have offered varying perspectives on the likely effects of these changes:

  • Jeff Denning (University of Texas) found that for every additional dollar in Grad PLUS loans, graduate schools increased prices by $0.64.
  • Robert Kelchen (University of Tennessee) found no direct connection in business, medical, and law schools.
  • Sandy Baum (Urban Institute) stated that most studies find the so-called "Bennett Hypothesis" (that increased federal aid enables colleges to raise prices) holds mainly for for-profit institutions.
  • Preston Cooper (American Enterprise Institute) noted that the previous system, where colleges could raise prices and the government would fund it through PLUS loans, was unsustainable.
  • Persis Yu (Protect Borrowers) suggested the caps may compel students to seek alternative funding, potentially turning to the private student loan market.
  • Betsy Mayotte (The Institute of Student Loan Advisors) indicated that these changes place borrowers who made financial decisions based on the SAVE plan in a challenging position.

Operational Challenges

The transition of millions of borrowers to alternative repayment plans is expected to present significant logistical challenges for loan servicing companies. Scott Buchanan, head of the Student Loan Servicing Alliance, indicated the process will be "bumpy" and that SAVE borrowers who have not been in repayment for years will require substantial support.