Borrowers of federal student loans in the United States are currently confronting a complicated and dynamic environment marked by recent policy shifts, legal settlements, and administrative delays. After a period during which collections on defaulted student loans were paused and then reinstated only to be delayed again, borrowers must also consider the evolving status of several key loan repayment and forgiveness programs.
As of September, over five million federal student loan borrowers were in default, according to data released by the U.S. Department of Education. Many more are at risk of falling behind on their loan payments this year, exposing them to potential default and enforcement actions. The financial strain on borrowers is compounded by uncertainties surrounding program adjustments and ongoing legal disputes.
Winston Berkman-Breen, legal director at Protect Borrowers, highlighted the predicament faced by many with student loans, stating that the simultaneous imposition of higher costs and the withdrawal of supportive tools to help manage loans generates significant anxiety among those affected.
Recently, the Education Department announced a postponement of involuntary collections on defaulted student loans until new repayment plans are finalized, with the timeline for this update yet to be determined. Borrowers should be aware of the following critical aspects of the current student loan landscape.
The Phase-Out of the SAVE Plan
The Saving on a Valuable Education (SAVE) plan was introduced with lenient repayment terms to assist borrowers but encountered legal challenges soon after its inception, leaving millions uncertain about their repayment options. Last December, a settlement brought an end to this plan. Currently, approximately 7.5 million individuals enrolled in the SAVE plan are expected to transition into alternative repayment arrangements.
The Department of Education has stated it will not accept new applications for the SAVE plan, nor will it approve pending ones, and intends to reassign existing enrollees to other programs. While details of this transition remain to be clarified, lending expert Kate Wood from NerdWallet recommends that borrowers proactively explore and apply for suitable repayment plans to avoid gaps in their loan management.
Options for Income-Driven Repayment
Borrowers seeking income-driven repayment plans can apply for programs such as the Income-Based Repayment (IBR), Pay As You Earn (PAYE), and Income-Contingent Repayment (ICR). These plans calculate monthly payments as a percentage of the borrower's discretionary income rather than the total loan balance, often resulting in more affordable payments.
Due to increased interest from borrowers switching plans, processing times for applications may be longer than usual. For personalized guidance, borrowers can use the Department of Education's loan simulator to determine which plan aligns best with their financial circumstances.
Public Service Loan Forgiveness (PSLF) Program Developments
The PSLF program remains unchanged for now; however, the previous administration introduced proposed changes to eligibility criteria that target nonprofit organizations with suspected illegal activities. These proposals include narrowing the definition of qualifying employers to exclude those involved in actions considered illegal, such as human trafficking or supporting terrorist organizations.
The enforcement details of these new criteria are not yet fully defined, leaving borrowers who rely on PSLF uncertain about their status. While the policy faces legal challenges from multiple states, it is anticipated to take effect in the near future. Experts advise those pursuing PSLF to continue with their payments until the situation becomes clearer.
Defaulted Loans and Collection Policies
Federal student loans in default, defined as being 270 days or more behind on payments, typically expose borrowers to wage garnishment and tax refund withholding. However, plans to resume such involuntary collections have been postponed recently by the Department of Education.
Borrowers in default may rehabilitate their loans by contacting their loan servicer to negotiate a payment plan. Successful completion of five payments under this arrangement can halt collection activities such as wage garnishment.
Graduate Loan Borrowing Limits
The "Big Beautiful Bill," a recent policy initiative, imposes new caps on federal student loans available to graduate students. Previously able to borrow amounts equal to the full cost of a degree, new limits now differentiate between professional and other graduate programs.
Starting July 1, students entering professional degree programs—including pharmacy, law, medicine, and others—face annual borrowing limits of $50,000 and a lifetime cap of $200,000. Other graduate students pursuing degrees in fields such as nursing or physical therapy will be limited to $20,500 annually and $100,000 in total loans.
Options for Loan Consolidation
Borrowers holding multiple federal student loans have the option to consolidate these into a single loan with a fixed interest rate and one monthly payment. This process can be initiated online through the Department of Education's loan consolidation portal and typically requires approximately 60 days to complete. The option to consolidate is available only once per borrower.
The Department of Education's recent announcements and evolving policies mark a period of significant change for student loan borrowers. It remains crucial for individuals to stay informed and actively manage their repayment options amidst these developments.