What we know about student loans and the Department of Education
Will the Department of Education’s restructuring impact student loans? Here’s what we know.
Experts say the biggest federal student loan review in decades is scheduled for July 1, and borrowers need to start preparing now.
President Donald Trump’s signature tax and spending package, passed last July, enacted sweeping changes to the way families borrow money for school. Changes include eliminating some repayment plans, introducing new plans, and adding new loan limits to other plans.
With so many changes happening at once, experts are warning students to learn about them now so they can choose the plan that best fits their budget. If a borrower enrolled in a particular plan does not take action, the Department of Education (ED) will automatically enroll the borrower in one of the new plans starting July 1.
“Go to studentaid.gov and see what’s happening with repayment options and what’s currently available,” says Jack Wallace, director of government and lending at Yrefy, a student loan refinance company. “Do it now. Don’t wait until then (July 1st). You might get something now that won’t be available later.”
What repayment plan will end?
On July 1, the ED stated:
- SAVE (Save your valuable education): Borrowers who are still enrolled in the now discontinued SAVE plan will be contacted by their loan servicer on or about July 1 to move to a new payment plan within 90 days. Approximately 7.5 million people were registered as borrowers out of a total of approximately 50 million people. Stacey McFettles, senior director of education finance at Bright Horizons, an education advisory service, said many people are holding back.
- “Standard repayment plans typically have higher monthly payments, so we strongly encourage borrowers to explore and apply for other income-driven plans at studentaid.gov before the automatic deadline expires,” she said.
Note: SAVE Borrower teeth For those who are making monthly payments and are considering taking advantage of lower payments until the end of the 90-day period, those payments are do not have “Existing borrowers can immediately switch to IBR (Income-Based Repayment), which is also income-based, and can move payments towards PSLF and IDR forgiveness,” McFettle said.
- PAYE (pay only what you earn): PAE registration will be discontinued for loans disbursed after July 1st. Existing borrowers with loans disbursed before July can use and keep it, but the plan will fully terminate by July 1, 2028.
- ICR (income conditional repayment): ICR will no longer be available for loans disbursed after July 1, and the plan will be completely phased out by July 1, 2028.
- IBR (income-based repayment): Existing IBR plans will be discontinued and will remain valid only for loans disbursed before July. This plan will close to new registrations on July 1st.
- parent plus: These loans are not over yet, but parents who have these loans must Consolidate them into a Direct Consolidation Loan by July 1 to remain eligible for income-driven options and programs like PSLF. Starting July 1, non-consolidated Parent PLUS borrowers will permanently lose access to IDR plans and PSLF. Because they are locked into a standard payment plan, there is no chance of forgiveness and monthly payments can be high.
What repayment plans are available starting July 1st?
Starting July 1, only two repayment plans will be available to new borrowers.
- Standard repayment plan: According to the ED, the default standard plan has fixed monthly payments and terms ranging from 10 to 30 years, depending on the loan amount and whether it is a consolidation loan. “Although the monthly payments may be higher than other plans, the total interest paid is typically lower and the repayment period is typically shorter,” the ED said.
- Repayment Assistance Plan (RAP): Income-driven plans that pay between 1% and 10% of your adjusted gross income (a flat rate of $10 per month if your income is less than $10,000 per year). The remaining balance after 30 years of repayment can be waived.
What loan modifications will be made?
From July 1, the following changes will be made to the following loans:
- graduate plus: These loans will no longer be offered. If you are already borrowing under these loans, you may continue to borrow under traditional or uncapped limits for up to three additional academic years or until graduation or program termination, whichever comes first. Grandfathered loans must have been disbursed at least once by July 1st. In all likelihood, students will be eligible for an extension if they apply before July 1, are approved and have the money credited to their account, experts said.
- graduate loans: New unsubsidized direct loans for graduate students, or loans in which the borrower is always responsible for interest payments, are capped at $20,500 per year ($100,000 total) for standard graduate programs and $50,000 ($200,000 total) for qualified professional programs, such as medical, dental, and law degrees.
- Parent plus: Loan limits are $20,000 per student per year, with a lifetime cap of $65,000 per dependent unless you already have dependents. You can then continue borrowing at your old limit for three academic years or until graduation, whichever comes first. Similar to the Grad PLUS loan, parents can apply and grandparent with the first tranche paid to the school before July 1st.
“A lot of things are changing. You need to be aware of the changes and see if it affects you,” McFettle said.
Medora Lee is USA TODAY’s money, markets and personal finance reporter. Please contact us at mjlee@usatoday.com. Subscribe to our free Daily Money newsletter for personal finance tips and business news every Monday through Friday.
