Transformation Looming for Higher Education Institutions
A Major Overhaul of Federal Student Loans: What You Need to Know
The U.S. Congress has passed a significant higher education policy update, marking the biggest change in two decades. This legislation, effective from July 1, 2026, aims to rein in rising federal student debt and address growing defaults and overdue payments.
Key Developments
- New Repayment Plans: The number of federal repayment plans will be reduced from seven to two. This change is expected to streamline the repayment process and make it more manageable for borrowers.
- End of Economic Hardship Deferments: Economic hardship deferments will no longer be available starting July 1, 2026. This means that borrowers will need to find other ways to manage their payments during difficult financial times.
- Borrowing Limits: The new law also sets limits on how much individuals can borrow for higher education.
- Resumption of Interest: The Biden Administration’s “Save on a Valuable Education” (SAVE) plan, which allowed zero percent interest accrual, was declared unlawful by courts. As of August 1, 2025, interest will resume for loans in the SAVE Plan, and about 7.7 million borrowers are being directed to shift to legal repayment plans.
- Public Service Loan Forgiveness (PSLF) Program Overhaul: The PSLF program is undergoing a proposed overhaul that could expand eligibility for some roles but restrict forgiveness eligibility for employees of organizations engaged in certain illegal or controversial activities. The final rule is expected by November 2025, with implementation in July 2026.
Impact on Borrowers and Colleges
The overhaul represents a significant shift toward stricter federal student loan management. Millions of borrowers will be affected, and colleges will need to adapt to tightened federal oversight and reduced loan flexibility.
The new accountability system will measure schools' access to federal lending based on graduates' earnings compared to non-attendees in the state. This could lead to changes in college pricing and student debt levels.
Additionally, schools face other financial headwinds, such as a sharp decline in foreign enrollment, a homegrown demographic challenge, and higher costs of everything from construction to insurance.
The new law also includes new caps on federal loans, new repayment plans, and a sweeping accountability system. These changes are intended to lower college prices and student debt through an overhaul of federal student loans.
Impact on Private Lenders
Private lenders, such as College Ave, SoFi, Sallie Mae, and Ascent, are expected to see more business due to the new policy changes. With borrowing limits set and some borrower protections eliminated, these lenders may attract more customers seeking alternative financing options.
Federal Student Debt and Defaults
Federal student debt stands at $1.7 trillion, affecting about 43 million borrowers. Half of the debt comes from graduate loans. With six million borrowers over 90 days late after pandemic protections ended, the issue of defaults remains a concern. The Department of Education has resumed collections on defaulted loans.
In summary, the latest major overhaul of federal student loans will significantly impact millions of borrowers and colleges. The new law aims to streamline repayment options, increase accountability in higher education, and protect taxpayers, but it also eliminates some borrower protections and narrows the scope for forgiveness programs. Borrowers are advised to familiarise themselves with the new repayment plans and seek advice if needed.
- The overhaul of federal student loan policy, effective from July 1, 2026, falls under the category of education-and-self-development and policy-and-legislation, as it involves changes in higher education regulations aimed at reducing federal student debt.
- The impact of the new federal student loan law on private lenders, such as College Ave, SoFi, Sallie Mae, and Ascent, is a subject of general-news, as the policy changes, including borrowing limits and the elimination of some borrower protections, could attract more customers seeking alternative financing options.
