Student Loan Stimulus Package: Borrowing Caps, Forgiveness, and Rates

The federal student loan stimulus package signed into law on July 4, 2025 — the One Big Beautiful Bill Act — rewrites how Americans borrow for college and how they pay the money back. Most of its provisions take effect July 1, 2026. The law creates a new Repayment Assistance Plan, phases out several existing income-driven options, caps PLUS borrowing for the first time, and eliminates Grad PLUS loans for new borrowers. If you already have federal loans, you have decisions to make before specific deadlines; if you plan to borrow after July 1, 2026, your choices are narrower than they used to be.

The New Repayment Assistance Plan

The Repayment Assistance Plan (RAP) is the centerpiece of the law. For anyone who takes out a federal student loan on or after July 1, 2026, RAP is one of only two repayment choices. The other is a tiered standard plan with fixed, mortgage-style payments over 10 to 25 years depending on how much is owed.¹ Once you enroll in RAP, you cannot switch back to the standard plan.²

RAP payments are based on a percentage of adjusted gross income, with the rate climbing by income band:

AGI of $10,000 or less: a flat $10 per month
$10,001 to $20,000: 1% of AGI
$20,001 to $30,000: 2% of AGI
$30,001 to $40,000: 3% of AGI
$40,001 to $50,000: 4% of AGI
$50,001 to $60,000: 5% of AGI
$60,001 to $70,000: 6% of AGI
$70,001 to $80,000: 7% of AGI
$80,001 to $90,000: 8% of AGI
$90,001 to $100,000: 9% of AGI
Over $100,000: 10% of AGI

You get a $50 reduction in your monthly payment for each dependent in the household, down to a $10 floor.² There is no cap on monthly payments for high earners, and the brackets are not indexed for inflation, so a dollar of income increase moves you up the same ladder year after year. RAP does not shelter any portion of income from the calculation, and the $10 minimum applies even if you have zero income.³

Two features help your balance actually move. If a monthly payment doesn’t cover all the interest that accrued, the unpaid interest is waived rather than tacked onto the loan. And if an on-time payment reduces principal by less than $50, the Department of Education kicks in the difference (up to the amount of the payment) so your balance drops by at least $50 that month.² Any remaining balance is forgiven after 30 years of qualifying payments.⁴

If You Already Have Federal Student Loans

Existing borrowers face a transition period with real deadlines. The SAVE plan ended through a December 2025 settlement between the Trump administration and Missouri.⁵ The Income-Contingent Repayment (ICR) and Pay As You Earn (PAYE) plans are being phased out and will shut down by July 1, 2028.¹

Income-Based Repayment (IBR) stays open for anyone with loans taken out before July 1, 2026, and the law eliminated the “partial financial hardship” test that previously blocked some borrowers from enrolling.⁶ If you don’t plan to take out new loans, you can stay on your current standard, graduated, extended, or IBR plan, or voluntarily move to RAP starting July 1, 2026.¹ Take out any new federal loan on or after July 1, 2026, however, and you lose access to the legacy plans entirely — RAP or the tiered standard plan are the only options.

Borrowers currently on ICR, PAYE, or SAVE have until July 1, 2028 to pick RAP, the tiered standard plan, or IBR. If you miss that deadline, you’ll be automatically placed in RAP.⁷

One deadline is tighter. If you need to consolidate loans to qualify for IBR — a common step for Parent PLUS borrowers — your consolidation loan has to be disbursed by June 30, 2026. The Department of Education recommends applying at least three months before that date.⁶

New Caps on How Much You Can Borrow

Loan categories that used to have no federal ceiling now have one.

Graduate and Professional Students

Grad PLUS loans are eliminated for new borrowers effective July 1, 2026.⁸ Master’s and academic doctoral students can borrow up to $20,500 per year in unsubsidized Direct Loans, with a $100,000 aggregate cap. Students in professional practice doctoral programs such as medicine and law can borrow up to $50,000 per year with a $200,000 aggregate cap.⁹ A lifetime federal loan limit of $257,500 applies across all levels of study, not counting PLUS loans.¹⁰

There is a grandfather provision. If you were continuously enrolled in the same program at the same school as of June 30, 2026 and received a Direct Loan disbursement for that program before July 1, 2026, you can keep borrowing under the old rules for up to three more academic years or until you finish the degree, whichever comes first.¹¹ For context, roughly 16% of graduate students used Grad PLUS, concentrated in high-cost fields such as medicine and dentistry, and the private loans most will turn to can carry rates up to 18% depending on credit, compared with 8.9% on Grad PLUS.⁸

Parent PLUS Loans

Parent PLUS loans are capped at $20,000 per year per dependent student, with a $65,000 aggregate limit per child.⁹ If a parent borrowed a Parent PLUS loan, or the child borrowed a federal Direct Loan, before July 1, 2026, the old unlimited borrowing rules continue for that specific student.¹¹ Based on 2019–20 borrowing patterns, about 30% of Parent PLUS borrowers would have exceeded the new annual cap.

New Parent PLUS loans issued after July 1, 2026 come with sharper restrictions on the back end: no income-driven repayment, only the tiered standard plan, and no eligibility for Public Service Loan Forgiveness or any other forgiveness program.¹

Undergraduates

The subsidized Direct Loan program for undergraduates survived. An earlier draft of the bill would have eliminated it, but the final law kept it in place.⁷ Starting with the 2026–27 academic year, annual loan limits for students enrolled less than full-time are prorated in direct proportion to enrollment status.¹²

Forgiveness: What Still Works and What’s Taxable

Public Service Loan Forgiveness

PSLF survives. The requirements remain 120 qualifying monthly payments while working full-time for a qualifying government or nonprofit employer, and forgiveness under PSLF stays tax-free. Payments made under RAP count toward the 120.¹²

A new wrinkle takes effect July 1, 2026. The Education Secretary can deny PSLF to borrowers whose employers are found to have engaged in activities with a “substantial illegal purpose.” A regulation finalized in October 2025, following a March 2025 executive order from President Trump, defines that term to cover aiding violations of immigration law, supporting terrorism, and performing gender-affirming medical procedures on minors in violation of federal or state law, among other categories. Employers must attest under penalty of perjury that they have not engaged in such activities.¹³¹⁴

The rule is being challenged in court. A coalition of 22 state attorneys general led by California sued in federal district court in Massachusetts in November 2025, and a separate suit from the cities of Albuquerque, Boston, Chicago, and San Francisco together with teachers’ unions is pending in the same court.¹⁵¹³ As of June 2026, no court had blocked the rule.¹⁴

Taxes on Forgiven Loans

Forgiveness through RAP’s 30-year path is taxable. The American Rescue Plan Act provision that excluded forgiven student loans from income expired on December 31, 2025, and starting with tax year 2026 a forgiven balance is generally treated as cancellation of debt income.¹⁶¹⁷ PSLF, Teacher Loan Forgiveness, and discharges for death or total and permanent disability remain tax-free. Borrowers who are insolvent at the time of discharge may exclude the forgiven amount by filing IRS Form 982.

Employer Repayment Assistance Is Now Permanent

The law permanently extends the tax-free treatment of employer student loan repayment assistance under Section 127 of the Internal Revenue Code, a benefit originally created on a temporary basis by the CARES Act. The $5,250 annual exclusion limit is indexed for inflation starting in 2026.¹⁸ An employer can pay up to that amount toward your student loans without either side owing tax on the benefit.¹⁹ If your employer offers this benefit, the money comes off your balance without increasing your taxable wages.

Interest Rates for 2026–27

The law did not change the formula used to set federal student loan interest rates, which is tied to the 10-year Treasury note yield plus a statutory add-on. Rates on loans first disbursed between July 1, 2026 and June 30, 2027 are:

Undergraduate Direct Loans: 6.52%
Graduate unsubsidized Direct Loans: 8.07%
PLUS loans: 9.07%

Those are modest increases from the 2025–26 rates of 6.39%, 7.94%, and 8.94%.²⁰²¹

If you have federal student loans today, the dates to put on your calendar are June 30, 2026 for IBR-related consolidation, July 1, 2026 for the opening of RAP and the closure of legacy plans to new borrowers, and July 1, 2028 for the final selection deadline for current ICR, PAYE, and former SAVE enrollees.

1
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2
PHEAA. Repayment and Forgiveness
3
Education Trust. How the One Big Beautiful Bill Reshapes Financial Aid and Repayment
4
Massachusetts Office of the Attorney General. Repayment Assistance Plan (RAP)
5
U.S. Department of Education. Agreement With Missouri to End Biden Administration’s Illegal SAVE Plan
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Federal Student Aid. Big Updates on Student Loans
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NASFAA. Federal Student Aid Changes Under OB3
8
Georgetown University. What’s the Impact of Ending Grad PLUS Loans?
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Urban Institute. How New Federal Student Loan Limits Could Affect Borrowers
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NASFAA. What Graduate Students Need to Know
11
University of Iowa. Federal Loan Changes Effective July 1, 2026
12
Federal Student Aid Partners. Federal Student Loan Program Provisions Effective Upon Enactment Under One Big Beautiful Bill Act
13
NPR. Trump PSLF and Teacher Loan Forgiveness
14
NASFAA. ED’s Updated PSLF Form Request Adds Urgency to Court Challenge
15
California Attorney General. Attorney General Bonta Sues Over PSLF Changes
16
IRS Taxpayer Advocate. What to Know About Student Loan Forgiveness and Your Taxes
17
NASFAA. Some Student Loan Forgiveness Is Now Taxable
18
WesternCPE. OBBBA Student Loan Tax Changes
19
Bond, Schoeneck & King. Expanded Benefits for Educational Assistance Under the One Big Beautiful Bill Act
20
Federal Student Aid Partners. Interest Rates for Federal Direct Loans First Disbursed Between July 1, 2026 and June 30, 2027
21
Federal Register. Annual Notice of Interest Rates for Fixed-Rate Federal Student Loans