A new federal law signed by President Donald Trump on July 4 is expected to significantly reshape the student loan system, making the next four years more challenging for borrowers.
The U.S. Department of Education announced last week it will begin cracking down on student loan borrowers starting in August, citing the need for fiscal responsibility.
“Today, the U.S. Department of Education announced it will take an additional step to bring fiscal responsibility to the federal student loan portfolio by restarting interest accrual for borrowers with loans in the illegal Saving on a Valuable Education (SAVE) Plan on August 1, 2025,” the department said in a press release.
The One Big Beautiful Bill Act phases out several existing repayment options, reducing the number of available federal student loan repayment plans from seven to two. Affected programs include SAVE, Pay As You Earn (PAYE), Income-Based Repayment (IBR) and Income-Contingent Repayment (ICR).
Borrowers enrolled in these plans will have until July 1, 2028, to switch to a new option. The department urged borrowers to make repayment decisions soon, as the changes will begin taking effect this summer.
Interest on loans held by approximately 7.7 million borrowers in the SAVE plan will resume on Aug. 1.
According to the Education Data Initiative, Americans collectively owe more than $1.77 trillion in student loan debt. The Biden administration had previously paused interest accrual and expanded repayment options in an effort to ease the burden on borrowers, particularly during the pandemic.
Earlier this year, CNBC reported that about 42 million Americans hold federal student loans. Of those, roughly 5.3 million are in default, and another 4 million are more than 90 days past due, according to Department of Education data. TransUnion reported that one in five borrowers were over 90 days late on payments as of February.
The new legislation also imposes borrowing caps set to take effect July 1, 2026. Parent PLUS loans federal loans for parents of dependent undergraduate students will be capped at $20,000 per year, with a lifetime maximum of $65,000. Currently, parents can borrow up to the full cost of attendance minus any student aid.
Additionally, Grad PLUS loans which are available to graduate and professional students will be eliminated for new applicants starting in July 2026. Existing borrowers will be grandfathered in and may continue using the loans.
Graduate students seeking federal financial aid will instead need to rely on Direct Unsubsidized Loans. Professional degree seekers such as law or medical students will face an annual borrowing limit of $50,000 and a lifetime cap of $200,000. For those pursuing advanced degrees in nonprofessional fields, such as history or philosophy, the annual borrowing limit will be $20,500, with a lifetime cap of $100,000.
Incoming college students and their families are advised to take these changes into account when planning how to finance their education in the coming years.
