Changes to Federal Student Loans
If you have federal student loans, or plan to take them out, the rules have just changed. As of July 1, borrowers will have fewer choices for repayment plans, higher interest rates, and tighter borrowing limits. Here's what you need to know and what you should do about it.
No Saving SAVE
If you're in the SAVE repayment plan, expect to hear from your servicer throughout the month of July, because this Biden-era plan will be shuttered. Do nothing, and your loans default to the 10-year fixed repayment plan, which will likely cost more per month than other available options. In addition to the fixed payment plan, there are two other choices:
Income-Based Repayment (IBR): Pay 10 percent of discretionary income for 20 years, then any remaining balance is forgiven. This is the route that many borrowers have taken, but there is a caveat: if you take any new federal loans after July 1, you lose access to IBR even for old loans.
Repayment Assistance Plan (RAP): This is a new income-driven option, available as of July 1. Payments range from 1% to 10% of adjusted gross income, with forgiveness after 30 years. RAP waives interest if your payment doesn't cover it, which means that your balance won't balloon.
A couple of warnings: RAP is not indexed for inflation, so if your income merely keeps pace with inflation, payments could rise. There's also a so-called “cliff”, which means that if you earn just $1 more, you can suddenly bump up into a higher payment tier. Also, in the past, you could switch between plans and get credit for what you have already paid. That is no longer the case, so be careful about which plan you choose.
July 1 was also the date that new interest rates apply for student loans that remain in effect from July 1, 2026, through June 30, 2027. Rates are fixed for the life of the loan and don't affect existing loans.
Undergraduate loans: 6.52% (up from 6.39%)
Graduate/professional loans: 8.07% (up from 7.94%)
PLUS loans (parents + some grad students): 9.07% (up from 8.94%)
Additionally, there are new annual and total limits on total borrowing for federal student loans.
Undergraduate caps: unchanged at $5,500 in year one, $6,500 in year two, and $7,500 in years three and beyond, for a total of $31,000 over the course of an undergraduate degree
Graduate students: Graduate PLUS loans are eliminated for new borrowers; most grad programs now capped at $20,500/year and $100,000 total; medical, dental, law, and vet students can borrow up to $50,000/year and $200,000 total
Parents: PLUS loans now capped at $20,000/year per child and $65,000 total (previously unlimited up to cost of attendance)
What To Do Right Now
Run your numbers at the Federal Student Aid loan simulator or use a free calculator from TISLA, the Institute of Student Loan Advisors. There are a lot of moving parts to your decision, so be careful and think it through. For example, if you consolidate your loans after July 1, it eliminates your access to IBR and wipes out existing repayment credits toward forgiveness.
Guardrails
The decision to borrow money to attend college can be a smart one, but it presumes that you do not borrow so much as to create a financial burden. Students should borrow less than what they anticipate earning in their first year of work. For the parents who want to pitch in to shoulder the burden, do not forgo your financial planning needs for the benefit of the kids. Borrowing for all children should be less than total annual income, including cosigned loans.