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 imposes new borrowing caps on Parent PLUS Loans and Direct Loans and eliminates the Grad PLUS Loan program. These changes take effect July 1, 2026, unless otherwise noted.

Parent PLUS Loans

Parent PLUS Loans will have a $20,000 annual limit and a $65,000 total limit per dependent student. Currently, parents can borrow up to the full cost of their child’s undergraduate education, minus any financial aid received.
There is a three-year grace period on the new borrowing limits for parents who have borrowed under this program before June 30, 2026 — essentially allowing parents of current undergraduate students to continue borrowing up to the full cost of college if they need to.

Grad PLUS Loans

The Grad PLUS Loan program, which allows graduate students to borrow up to the full cost of their education (minus any aid received), has been eliminated.
It will be replaced with graduate loans under the existing federal Direct Loan program, but with new loan limits: $20,500 per year and $100,000 total for graduate students and $50,000 per year and $200,000 total for professional students (e.g., medicine, law). These new limits do not include undergraduate loans. (Current graduate student Direct Loan limits are $20,500 per year and $138,000 total.)
The new law allows current graduate and professional students to continue borrowing under the current Grad PLUS Loan program during their remaining schooling or for three years, whichever is less, provided they are enrolled in a graduate or professional program as of June 30, 2026, and they have received at least one loan under the Grad PLUS program.

Direct Loans

There is a new lifetime student loan borrowing cap of $257,000 — this limit applies to undergraduate and graduate loans, not Parent PLUS Loans.

New student loan repayment plans and hardship rules

The legislation significantly alters the landscape of federal student loan repayment programs. The Saving on a Valuable Education (SAVE) Repayment Plan, the Pay As You Earn (PAYE) Repayment Plan, and the Income Contingent Repayment (ICR) Plan will be phased out and eliminated by July 1, 2028. Borrowers currently enrolled in one of these plans must transition to a new repayment plan by July 1, 2028, as described below.

In addition, as of July 1, 2026, the legislation creates two new repayment plans: the Standard Repayment Plan and the Repayment Assistance Plan.

Standard Repayment Plan

Under this plan, borrowers pay a fixed amount each month over a fixed period of time. Before July 1, 2026, payments were spread over 10 years. Under the Standard Repayment Plan, the amount of time a borrower has to repay a student loan depends on the loan balance:

Less than $25,000 — 10 years
$25,000 to less than $50,000 — 15 years
$50,000 to less than $100,000 — 20 years
$100,000 and over — 25 years

There is no prepayment penalty; borrowers can pay off their loans early.

Repayment Assistance Plan

The Repayment Assistance Plan (RAP) is a new income-based repayment plan that bases monthly loan payments on a borrower’s adjusted gross income (AGI). This plan is only available to undergraduate and graduate students, not parents. Under RAP, a borrower’s monthly payment will be set as follows based on AGI:

$10,000 or less — flat payment of $10 per month ($120 per year)
$10,001 to $20,000 — 1%
$20,001 to $30,000 — 2%
$30,001 to $40,000 — 3%
$40,001 to $50,000 — 4%
$50,001 to $60,000 — 5%
$60,001 to $70,000 — 6%
$70,001 to $80,000 — 7%
$80,001 to $90,000 — 8%
$90,001 to $100,000 — 9%
$100,001 and over — 10%

Payments are applied first to interest, then fees, then principal. If the required payment is less than any new interest that accrues, the extra interest is waived. After 30 years of on-time payments, all remaining debt is forgiven. (Current income-based plans forgive remaining debt after 20 or 25 years.)

For single borrowers, only the borrower’s AGI is used to determine the monthly payment. For married borrowers, joint AGI is used if the couple files a joint federal income tax return; otherwise, for married borrowers who file separate income tax returns, only the borrower’s AGI is used. For borrowers with dependents, the monthly payment will be reduced by $50 for each dependent listed on a borrower’s federal income tax return.

Payments made under RAP qualify for the federal Public Service Loan Forgiveness (PSLF) program.

Which repayment plan applies?

Borrowers who obtain new loans on or after July 1, 2026, will repay them under either the new Standard Repayment Plan or the Repayment Assistance Plan.

Existing borrowers who are currently enrolled in the SAVE, PAYE, or ICR Plan must transition to a new repayment plan by July 1, 2028. They can choose either the federal government’s remaining income-driven plan — called the Income-Based Repayment (IBR) Plan — or the new Repayment Assistance Plan. More information should be available from the Department of Education in the coming months.

Changes to deferment and forbearance rules

The new law tightens the ability of borrowers to pause repayment on their federal student loans.

New deferment rule: Starting July 1, 2027, the economic hardship deferment and the unemployment deferment will be eliminated.
New forbearance rule: For new loans issued July 1, 2027, and later, a forbearance (a payment pause due to short-term financial difficulty) will be limited to a single nine-month pause every 24 months.

Expanded workforce training focus and 529 plan qualified expenses

The legislation seeks to encourage non-traditional post-secondary education paths in two ways.

Workforce Pell Grant

Starting with the 2026–2027 school year, a new Workforce Pell Grant will be available to students who are enrolled in accredited, short-term (8–15 weeks duration) job-focused programs, such as certificate programs at community colleges. Funding will be pro-rated based on the program’s length, meaning a Workforce Pell Grant will be less than a standard Pell Grant (the maximum standard Pell Grant for the 2025–2026 year is $7,395).

Expanded qualified expenses for 529 plans

Starting with the 2026 tax year, the new law broadens the list of qualified 529 plan expenses to include tuition, fees, books, and expenses for workforce credentialing programs (described in the law as a “recognized post-secondary credential program”). This includes programs that may not have fit under the existing vocational or apprenticeship allowed use cases.

In addition, starting in 2026, the limit on K-12 qualified expenses has been increased from $10,000 to $20,000 per year and additional expenses are now qualified at the K-12 level, including instructional materials (both hard copy and online), tuition for tutoring or educational classes outside of school, fees for dual enrollment at an institution of higher education, standardized test fees, and educational therapies for students with disabilities (e.g., occupational therapy, speech therapy). The new law also permanently allows rollovers from a 529 plan to an ABLE account (a tax-advantaged savings account for individuals with disabilities).

Expanded endowment tax on wealthy colleges

The new law increases the excise tax on the endowments of wealthier colleges and universities. Currently, private schools with at least 500 tuition-paying students and an endowment of at least $500,000 per student pay a 1.4% excise tax on net investment income from their endowments. This tax was enacted in the Tax Cuts and Jobs Act of 2017.

Under the new law, starting in tax year 2026, colleges with more than 3,000 tuition-paying students will pay excise tax on net investment income from their endowments based on an “endowment dollars per student” model as follows:

$500,000 to $750,000 endowment per student — 1.4%
$750,001 to $2,000,000 endowment per student — 4%
Over $2,000,000 endowment per student — 8%

Many colleges rely on income from their endowments to fund student financial aid programs, so colleges and universities impacted by this new endowment tax could potentially reduce their aid under these programs.

Miscellaneous provisions

The legislation includes several other education-related provisions, including:

Pell Grant eligibility: The new law adjusts the way Pell Grant eligibility is determined based on the Student Aid Index calculation in the FAFSA (Free Application for Federal Student Aid) and on the amount of private full-ride scholarships received, which is expected to result in fewer students qualifying for a traditional Pell Grant. This adjustment takes effect starting with the 2026–2027 school year.
FAFSA changes on small businesses and family farms: Starting July 1, 2026, the FAFSA will no longer count the net worth of small businesses (100 employees or less), family farms, and commercial fishing businesses when calculating aid eligibility. This change will take effect with the 2026–2027 school year.
Employer-provided student loan repayment assistance: The legislation permanently extends the $5,250 tax-free employer-provided student loan repayment assistance starting with the 2026 tax year. The $5,250 threshold will be indexed for inflation starting in 2027.
Claiming American Opportunity Tax Credit and Lifetime Learning Credit: Starting with the 2026 tax year, taxpayers who claim either of these education tax credits on their federal income tax return must include their Social Security number and, where applicable, the college’s employer identification number (EIN).