MILLIONS of Americans are being pressured to pay back their loans, worth up to hundreds of thousands of dollars, as the federal government works to recoup the cash.
The government is rolling out new policies on federal student loans, including three major changes in attempt to recover the trillions of dollars it is owed.
The federal government is owed trillions of dollars in student loans[/caption]
Student loan borrowers owe the federal government an astounding $1.69 trillion.
This eye-raising figure has pushed the Trump administration to tweak the repayment plans available and resume charging interest on nearly eight million Americans in the wake of the pandemic-era pause.
“Since day one of the Trump Administration, we’ve focused on strengthening the student loan portfolio and simplifying repayment to better serve borrowers,” US Secretary of Education Linda McMahon said in a statement obtained by Fox.
When the president signed the One Big Beautiful Bill Act into law on July 4, one of the key provisions was that Americans with outstanding federal student loans now just have two repayment options.
Popular income-driven repayment plans like the SAVE plan established under the Biden administration, Pay As You Earn, and Income-Contingent Repayment are being axed.
New student borrowers are being forced to choose between the new standard repayment plan or Repayment Assistance Plan by July 1, 2026.
The standard plan will have a term length ranging from 10 to 25 years depending on the loan size while the new Repayment Assistance Plan will require 30 years of payments before a student qualifies for loan forgiveness.
Existing borrowers who still owe money as of July 1, 2028, will then be forced to switch to the classic Income-Based Repayment plan, the new Repayment Assistance Plan, or the standard plan.
The Education Department is encouraging all borrowers in the SAVE Plan to switch plans as soon as possible because they can’t access important loan benefits or make progress toward loan discharge programs authorized by Congress, according to McMahon.
The department is also urging borrowers to consider switching over to the Income-Based Repayment Plan, authorized under the Higher Education Act, as a temporary and safer alternative to PAYE and ICR Plans.
INTEREST-ING
Before the student loan repayment program changes are officially enforced, roughly 7.7 to 8 million borrowers on the expiring SAVE Plan will be subject to interest payments starting on August 1, 2025.
The change comes due to a court injunction blocking the implementation of the SAVE Plan and invalidating its proposed 0% interest rate feature.
Imposing interest for SAVE enrollees is also part of the federal government’s effort to encourage students to transition their repayment plans sooner versus later.
The impending interest is “an additional step to bring fiscal responsibility to the federal student loan portfolio,” the Department of Education announced Wednesday.
New legislation’s impact on student loans
In addition to reducing the types of repayment plans, Trump’s One Big Beautiful Bill will impact the amount of money that students can borrow from the federal government.
It will get rid of the Graduate PLUS Program, a repayment option that allows graduate or professional students to borrow up to the full cost of attendance.
Under the new legislation, graduate students will face a cutoff of $100,000 for lifetime loans, while medical and law students will be capped at $200,000.
The cap for Parent PLUS loans will also be set at a $65,000 per dependent student and will not be eligible for repayment programs.
The new legislation will also affect how student loan deferment works, eliminating deferment options for those struggling due to unemployment or economic hardship.
Borrowers will, however, be permitted to rehabilitate defaulted loans twice instead of just once.
Other changes under the bill include Pell Grant eligibility, including the establishment of Workforce Pell Grants for individuals in career or technical-based education programs.
Before students are subject to interest payments come August, the department is encouraging borrowers to compare repayment plans and find the most suitable one using its loan simulator.
HAND IT OVER
Alongside the changing student loan repayment plans and the new interest charges, another switch regarding student loan collection is underway.
In May, Trump lifted a five-year pause on involuntary student loan collection imposed during the pandemic, allowing the government once again collect unpaid loans.
That month, nearly 200,000 defaulted student loan borrowers started receiving 30-day notices informing them that their federal benefits could be withheld as early as June, per a press release from the Education Department.
Student Loan Statistics
- Student loan debt in the US is over $1.777 trillion
- Federal student loan debt accounts for 92.2%
- Average federal student loan debt amount per person is $38,375
- Students at a public university borrow $31,960 on average to attain a bachelor’s degree
Credit: Education Data Initiative
Around one-third of the six million newly delinquent borrowers were expected to enter default in July, per estimates from TransUnion.
As a result, around two million students are at risk of having 15% of their paycheck withheld because default loans are at risk of government-imposed penalties like withheld tax refunds, reduced Social Security payments, or garnished wages.
As of late last month, the department shared it had received almost $282 million in collections on defaulted federal student loans.
The Education Department also has yet to withhold monthly federal benefits like Social Security checks since resuming collections.
In addition to switching up the student loan repayment system, Trump’s One Big Beautiful Bill will roll out a major tax break for seniors after a “landmark” change.
The bill could also cost taxpayers tens of millions of dollars after a “payment error” linked to SNAP benefits.
The government is taking several key steps to recoup the money it is owed from student loan borrowers[/caption]
