Key Higher Education Changes in the New Tax Bill

The One Big Beautiful Bill Act (OBBBA), signed into law in July 2025, includes multiple provisions that affect higher education. Key changes include new borrowing limits for students and parents under federal loan programs, streamlined student loan repayment plans, stricter rules on the ability of borrowers to pause student loan repayment, the promotion of workforce training programs, expanded qualified expenses for 529 plans, and an increased endowment tax on wealthy colleges and universities, among other items.

New Borrowing Limits Under Federal Loan Programs

The legislation introduces new borrowing caps for Parent PLUS Loans and Direct Loans and eliminates the Grad PLUS Loan program. Unless otherwise noted, these changes take effect on July 1, 2026.

Parent PLUS Loan Changes

Under the new law, Parent PLUS Loans will carry:

• $20,000 annual limit

• $65,000 lifetime limit per dependent student

Currently, parents can borrow up to the full cost of their child’s undergraduate education, minus any financial aid received.

Parents who borrowed through the Parent PLUS program before June 30, 2026, will receive a three-year grace period. During this period, they may continue borrowing under the existing rules.

Elimination of the Grad PLUS Loan Program

The Grad PLUS Loan program, which allowed graduate students to borrow up to the full cost of attendance minus aid, has been eliminated.

Replacement Through Direct Loans

Graduate and professional students will now borrow through the federal Direct Loan program, subject to new limits:

• Graduate students:

  • $20,500 per year

  • $100,000 lifetime limit

• Professional students (e.g., medicine, law):

  • $50,000 per year

  • $200,000 lifetime limit

These caps apply only to graduate or professional borrowing and do not include undergraduate loans. (Current Direct Loan limits for graduate students are $20,500 annually and $138,000 total.)

Transition Rule for Current Students

Students enrolled in a graduate or professional program as of June 30, 2026, who have already received at least one Grad PLUS Loan, may continue borrowing under the current Grad PLUS rules for the remainder of their program or for up to three years, whichever comes first.

Direct Loan Lifetime Cap

The legislation establishes a new lifetime borrowing limit of $257,000 per student. This cap applies to combined undergraduate and graduate Direct Loans but does not include Parent PLUS Loans.

Changes to Student Loan Repayment Plans

The law significantly reshapes federal student loan repayment options.

By July 1, 2028, the following repayment plans will be phased out:

• Saving on a Valuable Education (SAVE)

• Pay As You Earn (PAYE)

• Income Contingent Repayment (ICR)

Borrowers enrolled in these plans must switch to a new repayment option by that date.

New Repayment Plans Beginning July 1, 2026

Standard Repayment Plan

Under the revised Standard Repayment Plan, borrowers make fixed monthly payments over a repayment period that depends on their loan balance:

• Less than $25,000 — 10 years

• $25,000 to under $50,000 — 15 years

• $50,000 to under $100,000 — 20 years

• $100,000 and over — 25 years

Borrowers may repay loans early without penalty.

Repayment Assistance Plan (RAP)

The Repayment Assistance Plan is a new income-based repayment option available to undergraduate and graduate borrowers (but not parents). Monthly payments depend on adjusted gross income (AGI):

• $10,000 or less — $10 per month

• $10,001–$20,000 — 1% of AGI

• $20,001–$30,000 — 2%

• $30,001–$40,000 — 3%

• $40,001–$50,000 — 4%

• $50,001–$60,000 — 5%

• $60,001–$70,000 — 6%

• $70,001–$80,000 — 7%

• $80,001–$90,000 — 8%

• $90,001–$100,000 — 9%

• Over $100,000 — 10%

Payments first cover interest, then fees, and finally principal. If a payment does not cover newly accrued interest, the unpaid interest is waived. After 30 years of on-time payments, any remaining balance is forgiven.

For married borrowers, joint AGI applies only if the couple files jointly. Borrowers with dependents receive a $50 monthly reduction per dependent. Payments made under RAP qualify for Public Service Loan Forgiveness (PSLF).

Which Repayment Plan Applies?

• New borrowers (on or after July 1, 2026):
  Standard Repayment Plan or Repayment Assistance Plan

• Existing borrowers in SAVE, PAYE, or ICR:
  Must transition by July 1, 2028, to either the Income-Based Repayment (IBR) Plan or RAP

The Department of Education will release additional guidance.

Changes to Deferment and Forbearance

The law tightens access to repayment pauses.

Deferment Changes

Beginning July 1, 2027, the economic hardship and unemployment deferments will be eliminated.

Forbearance Limits

For loans issued on or after July 1, 2027, borrowers may use forbearance only once every 24 months, for a maximum of nine months.

Workforce Training and Education Savings Changes

Workforce Pell Grant

Starting in the 2026–2027 school year, students enrolled in accredited short-term workforce programs (8–15 weeks) may qualify for a Workforce Pell Grant. Awards are prorated based on program length and are smaller than the standard Pell Grant.

Expanded 529 Plan Qualified Expenses

Beginning in tax year 2026, 529 plans may cover:

• Workforce credentialing programs

• Tuition, fees, and books for eligible programs

K–12 qualified expenses increase from $10,000 to $20,000 per year and now include tutoring, instructional materials, dual-enrollment fees, standardized test fees, and educational therapies. The law also permanently allows rollovers from 529 plans to ABLE accounts.

Expanded Endowment Tax on Wealthy Colleges

Starting in tax year 2026, private colleges with more than 3,000 tuition-paying students will face a tiered excise tax on endowment income:

• $500,000–$750,000 per student — 1.4%

• $750,001–$2,000,000 — 4%

• Over $2,000,000 — 8%

Because many institutions use endowment income to fund financial aid, affected schools may reduce aid offerings.

Additional Education-Related Provisions

The legislation also includes:

• Pell Grant eligibility changes beginning in the 2026–2027 school year

• FAFSA asset exclusions for small businesses, family farms, and fishing operations starting July 1, 2026

• Permanent extension of employer student loan assistance ($5,250, indexed to inflation starting in 2027)

• New reporting requirements for education tax credits beginning in tax year 2026

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