Federal student loan repayment framework overhauled under new legislation

Federal student loan repayment structures are undergoing a significant overhaul under the One Big Beautiful Bill Act, with the SAVE income-driven repayment plan officially eliminated. The Department of Education has confirmed that starting July 1, 2026, borrowers with Direct Loans first disbursed on or after this date must utilise either the Repayment Assistance Plan or the Tiered Standard Plan. This legislative shift marks a departure from the current landscape where numerous options, including various income-driven plans, were available to federal borrowers.

While the new rules primarily target future disbursements, the transition will not leave existing borrowers untouched. Those with loans disbursed before July 1, 2026, retain access to their current plans, including the Standard, Graduated, and Extended Repayment Plans, as well as existing income-driven options. However, the legislation mandates that these borrowers receive notices from their servicers regarding their status. If existing enrollees take no action within a 90-day window following these notifications, they will be required to switch to a new plan, effectively ending the era of the SAVE plan for the current cohort.

For the two new options introduced under the Act, the Repayment Assistance Plan offers forgiveness after 30 years of qualifying payments. Monthly payments under this scheme are calculated as a percentage ranging from 1% to 10% of a borrower's annual adjusted gross income, with a deduction of $50 for each dependent claimed on federal tax returns. A key feature of the RAP is the cancellation of unpaid interest that accrues from the due date to the due date after entering the plan, ensuring the outstanding balance does not exceed the original amount provided the borrower makes timely payments.

The alternative for new borrowers is the Tiered Standard Plan, which operates on a fixed payment model rather than income-based calculations. Payments under this plan are determined by the loan balance, interest rate, and repayment term, with a maximum repayment period varying based on the debt amount. While monthly payments are fixed and designed to clear the loan within a specific timeframe, they must be at least $50. Notably, borrowers with all federal loans disbursed prior to the July 2026 deadline will not have access to the Tiered Standard Plan, preserving their eligibility for existing fixed repayment schedules.

Looking further ahead, the regulatory changes extend beyond the initial 2026 implementation. The One Big Beautiful Bill Act schedules the phase-out of remaining income-driven plans, including Income-Based Repayment, Income-Contingent Repayment, and Pay As You Earn, by July 1, 2028. This timeline suggests a continued consolidation of federal loan management strategies, moving away from the diverse array of forgiveness-based options that characterised the previous administration's approach to student debt.

Private student loan borrowers, who generally lack the flexibility of federal repayment options, are largely unaffected by these specific legislative changes. Their terms remain set by individual lenders, often featuring fixed payments or interest-only options while in school. However, the broader context of federal policy shifts highlights the increasing centralisation of student loan regulation, with the Department of Education playing a pivotal role in defining the financial obligations of millions of borrowers in the coming years.