The student loan system in the United States is on the cusp of one of the most sweeping overhauls in a decade, with a series of major reforms set to begin unfolding within weeks.
As the Department of Education struggles to implement President Donald Trump’s One Big Beautiful Bill Act (OBBBA), millions of borrowers will see their repayment options and possible paths to loan forgiveness radically reshaped — and some benefits disappear entirely.
Why will income-based repayment become more affordable?
One of the first changes to arrive before the end of December is a significant expansion of the Income-Based Repayment (IBR) plan. Previously, borrowers had to demonstrate “partial financial hardship” to qualify. Trump’s “big beautiful bill” removes this barrier and opens IBR to higher incomes and most federal student loan holders.
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The Department of Education acknowledged that its systems were still rejecting eligible applicants earlier this fall. Under an agreement with the American Federation of Teachers, officials confirmed the updates will be completed by the end of December. Until then, “services will hold IBR applications that would otherwise be denied,” according to the new federal guidelines.
Higher education expert Mark Kantrowitz said the removal of the hardship test will allow many borrowers who were previously barred from IBR to finally gain access to it. Under this scheme, borrowers typically pay 10% of discretionary income – although older loans may require 15% – with forgiveness after 20 or 25 years.
What happens to other income-based repayment plans?
Easier entry into IBR coincides with the phasing out of several other repayment options. Trump’s tax and spending package ended the Biden-era Savings for Valued Education (SAVE) plan and set an end for July 2028 for Pay As You Earn (PAYE) and Income-Contingent Repayment (ICR).
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According to Kantrowitz, approximately 2.5 million people currently use ICR or PAYE. Many ICR borrowers will pay less under IBR, while those using PAYE – particularly borrowers who took out loans after July 2014 – may see little change. However, monthly bills under IBR will be higher than they would be with SAVE.
By 2028, the landscape will be narrowed to just two income-related plans: IBR and a new system, the Repayment Assistance Plan (RAP), due to launch in 2026.
What is the new repayment assistance plan and why does it matter?
The upcoming RAP scheme will offer some borrowers the lowest monthly repayments – but with a longer wait for forgiveness. Debt cancellation only occurs after 30 years, compared to 20 or 25 years under existing plans. The RAP structure spreads payments over a wider timeline, reducing monthly obligations but extending debt well into the future.
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Borrowers will still be able to switch between payment plans without losing progress toward forgiveness. “The good news is that all of these plans cross-pollinate, so any ‘number’ they have on ICR or PAYE will also count toward whatever plan they switch to,” said Betsy Mayotte, president of The Institute of Student Loan Advisors.
When will student loan forgiveness be taxed again?
Another key change comes on January 1, 2026, when the income-based repayment (IDR) exemption ends. Without action from Congress, borrowers who receive forgiveness after that date could face a significant tax burden.
Historically, forgiven debt is considered taxable income. The creditor will issue a Form 1099-C, which requires the borrower to report the canceled amount. While the US bailout temporarily waived federal tax liability for student loan discharges until the end of 2025, the OBBBA is not extending that relief.
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To protect borrowers who are already nearing forgiveness, the Department of Education has agreed not to issue 1099-C forms to anyone who reaches their forgiveness milestone by the end of 2025, even though the settlement itself will be processed in 2026. Officials are advising borrowers in the SAVE plan who are nearing eligibility to consider switching to PAYE, IBR or ICR by May 31. December to secure a free cancellation by December 20
Borrowers anticipating discharge beginning in 2026 are encouraged to consult with tax professionals, particularly regarding potential exemptions from insolvency or state tax implications.
What other major changes will come into effect in 2026?
From July 2026, several structural changes will restructure lending and repayment:
- New federal loan limits for undergraduate and graduate students will limit access to higher loan amounts.
- Parent PLUS borrowers face the most pressing deadline – those who do not join the Direct Loan program by July 1, 2026 will lose access to income-driven repayment entirely. Since consolidation can take one to three months, the effective window for action is much narrower.
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- Consolidated Parent PLUS borrowers must then enroll in ICR and make at least one payment by July 2028 to qualify to transition to IBR once ICR is phased out.
- The RAP will debut in mid-2026, but at the same time, the SAVE plan remains embroiled in lawsuits that could force some borrowers into new ways to repay.
