Federal student loans change on July 1. Act now before choices narrow

One of the biggest federal student loan overhauls in decades is coming July 1, and borrowers should start preparing now, experts said.

President Donald Trump's signature tax and spending package passed last July enacted sweeping changes to the way families can borrow to pay for school. Changes include eliminating some repayment plans, introducing new ones and adding new loan limits to others.

Since there will be so many changes at once, experts are warning students to learn about them now so they can choose plans that best fit their budgets. If borrowers enrolled in certain plans don't act, the Department of Education (ED) will automatically enroll them into one of the new plans that launch on July 1.

"Go to studentaid.gov and look around and see what’s going on with repayment options and what's available now," said Jack Wallace, director of government and lender relations at student loan refinancing company Yrefy. "Do it now. Don't wait until then (July 1). You may qualify for something now that wouldn’t be available later.

What repayment plans are ending?

On July 1, the ED said:

• SAVE (Saving on a Valuable Education): Borrowers still enrolled in the now defunct SAVE plan will be contacted around July 1 by their loan servicers to transition to a new payment plan within 90 days. Approximately 7.5 million, out of about 50 million total, borrowers were enrolled. Many are in forbearance, said Stacey MacPhetres, senior director of education finance at Bright Horizons, a provider of educational advisory services.
  • "Because the standard repayment plan typically leads to higher monthly payments borrowers are strongly encouraged to explore and apply for other income driven plans on studentaid.gov before the expiration of the automatic deadline," she said.

Note: Borrowers in SAVE who are making monthly payments and think they will take advantage of the lower payments until the end of the 90-day period need to know "if they are eligible for and want to make progress toward PSLF (public service loan forgiveness) or Income-Driven (IDR) forgiveness, those payments will not count," MacPhetres said. "Existing borrowers can immediately switch to IBR (Income-Based Repayment), which is also income based and will allow payments to progress toward PSLF and IDR forgiveness."

• PAYE (Pay As You Earn): PAYE enrollment will be cut off for loans disbursed on or after July 1. Existing borrowers with loans disbursed prior to July can use and keep it, but the plan will completely end by July 1, 2028.
• ICR (Income-Contingent Repayment): ICR won't be available for loans disbursed on or after July 1, and the plan will fully phase out by July 1, 2028.
• IBR (Income-Based Repayment): Existing IBR plans are grandfathered and will remain active only for loans disbursed before July. The plan will be closed to new enrollees on July 1.
• Parent PLUS: These loans aren't ending, but parents with these loans must consolidate them into a Direct Consolidation Loan before July 1 to remain eligble for income-driven options and programs like PSLF. After July 1, Parent PLUS borrowers who haven't consolidated permanently lose access to IDR plans and PSLF. They'll be locked into standard payment plans, which can mean higher monthly payments without any chance of forgiveness.

What repayment plans will be available beginning July 1?

Only two repayment plans will be available to new borrowers, starting July 1:

• Standard Repayment Plan: The default standard plan features fixed monthly payments and spans 10 to 30 years, depending on the loan amount and whether it's a consolidation loan, the ED said. "Monthly payments can be higher than other plans, but total interest paid is usually lower and length of repayment is usually shorter," the ED said.
• Repayment Assistance Plan (RAP): An income-driven plan with payments between 1% and 10% of your adjusted gross income (or a flat $10 per month if your income is less than $10,000 per year). Forgiveness is available for balances after 30 years of repayment.

What loan changes will be made?

The following loans will see changes, beginning July 1:

• Graduate Plus: These loans will no longer be offered. If you're already borrowing under these loans, you can continue to borrow under legacy, or uncapped, limits for up to three additional academic years, or until graduation or the program ends, whichever comes first. Grandfathered loans must be have had at least one disbursement before July 1. Conceivably, a student can apply, be approved and have money deposited into an account before July 1 and be eligible for the extension, experts said.
• Graduate loans: New direct unsubsidized loans, or those where the borrower is always responsible for paying the interest, for graduate students are capped annually at $20,500 ($100,000 aggregate) for standard graduate programs and $50,000 ($200,000 total) for qualifying professional programs like for medical, dental and law degrees.
• Parent PLUS: Loans will be capped at $20,000 per year per student, with a $65,000 lifetime limit per dependent unless you already have one. Then, you may continue to borrow under the old limits for three school years, or until graduation, whichever comes first. Like Grad PLUS loans, a parent may apply and get a first tranche disbursed to the school before July 1 to be grandfathered.

"A lot is changing, and you have to be aware of the changes and see if they affect you," MacPhetres said.

Medora Lee is a money, markets, and personal finance reporter at USA TODAY. You can reach her at [email protected] and subscribe to our free Daily Money newsletter for personal finance tips and business news every Monday through Friday