We have seen lots of changes to the Federal student loan system over the last five years, specifically related to COVID.
The student loan payment system was already complicated before COVID, and during COVID we saw many options for assistance to borrowers such as suspended payments, interest freezes, and some temporary forgiveness plans.
With the passage of OBBBA, we are seeing some dramatic changes to student and parent borrowing limits, as well as increasing payment obligations – especially for graduate student and parent loans.
This may have a significant impact on borrowing strategies for families planning for college. Below we highlight key changes related to college financing resulting from OBBBA.
Borrowing Limits for Graduate Students
- The Graduate PLUS Loan is being eliminated
- Previously there were no caps on this loan and many graduate students relied on this for financing graduate and medical programs
- The Direct Unsubsidized Loan program will be sole source of Federal borrowing with new lifetime limits
- Pre-existing cap of $20,500 per year for graduate students ($50,000 for professional degrees)
- New Aggregate Limit of $100,000 ($200,000 for professional students)
- New lifetime borrowing limit cap of $257,600 across all Federal loan programs (excluding Parent PLUS)
Borrowing Limits for Parents (PLUS) & Undergrads
- New $20,000 cap per year per child
- New $65,000 lifetime cap per student
- Federal undergraduate student loans remain unchanged at a loan cap of $27,000 for four years, or $31,000 for students who take longer to receive their degree.
New Repayment Assistance Plan (RAP)
- Will be the default for many borrowers
- Calculating monthly payments based on progressive formula tied to Adjusted Gross Income
- Subsidizes unpaid interest (eliminating negative amortization)
- Forgiveness after 30 years of repayment
- All Legacy IDR (Income Driven Repayment) Plans will be phased out by July 2028
Summarizing the Changes
There are some impactful and positive changes to the new loan system.
Having less complicated systems for repayment, limits on borrowing per year and lifetime limits will add some guardrails for those parents and students who previously were able to borrow significantly past their means.
For some, the previous situation led to unmanageable debt, and no way to keep up with payments and balances that exponentially increased due to compounding interest.
The new changes from the OBBBA may have a significant impact on both how people plan for financing college, and their overall personal financial planning goals.
Many families who have not planned well, or who have had the unfortunate bad timing of negative financial circumstances that happen at the same time as college, were able to use easily obtainable loans such as the Parent PLUS loan.
This loan is much less strict for the approval process to the applicant, allowing many parents to borrow tens of thousands of dollars each year for four years for their student, even when it was a bad financial decision for their circumstances.
While these loan changes may create more difficulties for some parents when making a financing plan for their children for college, the overall effect may help them incur less financial burden, and possibly less negative affect on their retirement savings, which some parents sacrifice for their child’s education.
These changes may start to reshape how much students and parents are willing to borrow beyond what is financially sensible for their situation and being driven by the goal of a “Dream School”.
Placing limits on borrowing will hopefully help some families make better college decisions that are based on cost and college funding that makes sense for them.
Potentially we could see a significant reduction in the overall educational loan debt for families in America over time.
-DC