Student Loans Update: 8 Key Changes Students Must Know, Experts Warn 'Brace for Higher Debt'

The US Department of Education is implementing significant changes to the federal student loan system that could make it more difficult for some students to finance their education. Advocacy groups warn these reforms may force many to turn to riskier private loans or even abandon plans for higher education altogether.

The overhaul stems from President Donald Trump's sweeping One Big, Beautiful Bill Act, a multi-sector reform package that bundles changes to education, immigration, taxes, and federal spending into a single legislative push.

Framed by the administration as a return to "simpler, leaner government," the education provisions were designed to shrink the federal loan footprint and shift more responsibility onto states, institutions, and families. Supporters argue the law reins in ballooning federal liabilities, while critics say its scale and speed leave students with fewer safeguards just as higher-education costs continue to rise.

Major Changes Set to Take Effect in 2026

Under the legislation driven by President Donald Trump's plan, entire loan programmes will be either phased out or heavily capped. These new rules will come into force on 1 July 2026, with wide-ranging implications for current and future borrowers.

1. New Loan Caps

The new regulations will limit federal loans for graduate and doctoral programmes to $20,500 (£15,512) annually, with a total lifetime limit of $100,000 (£75,669). However, professional degree programmes such as law, medicine, and dentistry will have higher federal loan limits. An agency committee has proposed designating these high-cost fields as professional degrees, allowing students to borrow up to $200,000 (£151,338) over their lifetime.

2. End of the Grad PLUS Loan

Trump's bill also eliminates the Graduate PLUS program for new borrowers starting July 1, 2026. This federal student loan program is for students completing the Free Application for Federal Student Aid (FAFSA) and enrolling in graduate or professional programs, such as master's, law, or medical school. Previously, students could borrow up to their graduate school costs through the PLUS program and avoid private loans.

3. Fewer Repayment Plans

The Department of Education plans to phase out several existing repayment options—including Income-Contingent Repayment (ICR), Pay As You Earn (PAYE), and Savings on a Valuable Education (SAVE)—by July 2028. In their place, the department will expand the income-based repayment plans for high earners and introduce a new Repayment Assistance Plan next year. Ultimately, only two income-driven repayment plans will remain, streamlining options but reducing flexibility for borrowers.

4. Taxation of Loan Forgiveness

The legislation does not extend tax relief for loan forgiveness under income-driven plans. As a result, forgiveness at the 20- or 25-year mark under IBR, ICR, and PAYE plans is likely to be taxed as income starting 1 January 2026. The American Rescue Plan Act of 2021 had temporarily exempted forgiven student debt from taxation until the end of 2025. However, other forgiveness options—such as Public Service Loan Forgiveness and debt discharged through Total and Permanent Disability—will continue to be tax-free.

5. Parent PLUS Borrowers Face Restrictions

Parents with Parent PLUS loans who do not consolidate their debt through the federal Direct Consolidation Loan programme by 1 July 2026 will lose access to income-driven repayment options and, effectively, the ability to qualify for loan forgiveness. Parents are advised to act quickly and must enroll in the Income-Contingent Repayment (ICR) plan, making at least one payment before July 2028 to switch to other income-driven plans.

6. Challenges for Medical Students

While the bill raises the loan cap for professional degrees, it may not cover the rising costs of medical school. The average medical student graduates with around $232,100 (£175,627) in debt. Previously, students could supplement federal loans with Grad PLUS loans to cover extra expenses; now, the removal of this option could push future medical students toward high-interest private loans, increasing financial burdens.

7. Impact on Nursing and Healthcare Education

The Department plans to narrow the definition of professional degree programmes, which could limit access to federal aid for certain graduate students. This change could make it harder for nurses to obtain necessary credentials, potentially worsening the ongoing nursing shortage in the US. The restrictions may also disproportionately affect women pursuing careers in healthcare.

8. Act Now to Prepare

Borrowers are encouraged to apply before the new rules take effect to access existing limits and repayment options. However, some uncertainties remain, such as whether current students eligible for Grad PLUS loans after July 1, 2026, can opt out of Grad PLUS to access the new $50,000 (£37,834) unsubsidised loan cap. Acting early may help minimise future financial challenges.

These reforms mark a significant shift in US student lending, with stricter limits and fewer flexible repayment options on the horizon. Students and parents should review their options carefully and consider acting promptly to mitigate potential financial impacts.

Disclaimer: Our digital media content is for informational purposes only and not investment advice. Please conduct your own analysis or seek professional advice before investing. Remember, investments are subject to market risks and past performance doesn't indicate future returns.