If you were one of the 8.8 million federal student loan borrowers currently in default, then the New Year didn’t start off great.
In early January, the White House announced that it would officially begin garnishing wages, tax refunds, and other benefits from defaulted federal student loan borrowers beginning the week of Jan. 7. However, that never came to fruition.
In a stunning reversal just over a week later, the Department of Education (DoE) published an official press release on January 16th stating it would postpone these activities. The reason for this “temporary delay”, as they said, was to allow the DoE to focus on implementing the many changes outlined in the Working Families Tax Cuts Act – more popularly known as the “One Big, Beautiful Bill (OBBB)” signed into law on July 4, 2025.
What are these major OBBB reforms coming to federal student loan repayment terms? As it turns out, there are many! If you have federal student loans or are considering applying for them over the next few years, then here’s what you’ll need to know.
New Repayment Plan Options Beginning In 2026
One of the major criticisms of the current student loan repayment structure is that there are just too many of them. Borrowers are often overwhelmed by the menu of similar-sounding acronyms and nuances associated with each plan.
To help avoid this confusion and any misunderstandings, the OBBB will reduce them to just two options for new loans starting July 1, 2026.
Option 1 – A Standard Repayment Plan
The standard option is essentially just like it sounds – making fixed monthly payments over a pre-determined length of time (just like a fixed-rate mortgage). This is very similar to how the standard plan has always operated before, but with one important change: The length of the repayment term.
Historically, you had 10 years to pay off your loan. However, under the OBBB, your payment term could be anywhere from 10 to 25 years based on size of the original loan balance as follows:
- Up to $24,999 – 10 years (120 monthly payments).
- $25,000-$49,999 – 15 years (180 monthly payments).
- $50,000-$99,999 – 20 years (240 monthly payments).
- $100,000 or more – 25 years (300 monthly payments).
On the one hand, this could be good for some borrowers because it may mean a lower monthly payment. Think of it like when an auto loan payment is lower if you opt for a 72-month or 84-month loan instead of a 48-month or 60-month loan. Longer terms generally equal lower payments.
However, longer terms also mean more interest. Because of the way fixed-rate loans are calculated, the greater the repayment term, the more total interest paid over the life of the loan. For this reason, borrowers should look at the complete picture of principal and interest owed when considering how they’ll pay it back.
Option 2 – Repayment Assistance Program (RAP)
Under the OBBB, most of the current income-driven repayment (IDR) plans will be replaced with a brand new one: The Repayment Assistance Program (RAP).
Currently, there are four separate IDR plans in place, and it’s easy to mix up their rules. The goal of RAP is to simplify your choice by making it the only available IDR option after July 2026.
Instead of payments based on discretionary income like the current IDR plans, they will be calculated based on the AGI (adjusted gross income) reported on your federal tax return. Therefore, to be eligible, your tax returns will need to be up to date.
Here’s how payments will be calculated:
- A flat $10 per month for AGI less than $10,000.
- 1% of AGI for AGI of $10,001–$20,000.
- 2% of AGI for AGI of $20,001–$30,000.
- 3% of AGI for AGI of $30,001–$40,000.
- …
- 10% of AGI for AGI of $100,001 or greater.
A common complaint about IDR plans is that the low monthly payment inadvertently leads to interest accruement swelling, effectively making the balance never go down. To curb that from happening, RAP will be designed to waive interest if your payment doesn’t already cover it.
Additionally, it will also include a small matching payment (up to $50) made by the DoE. This ensures that the outstanding principal is reduced, and progress is made each month.
Another important change: RAP loans will be paid back over 30 years instead of the previous terms of 20 to 25 years. After 30 years, any remaining balance will be forgiven.
Again, this option isn’t available yet. RAP should be launched no later than July 1, 2026.
What Will Happen to the Current IDR Plans?
Unfortunately, those enrolled in the current IDR plans will have to eventually say their goodbyes. Here are the details.
ICR, PAYE, and SAVE Will Be Phased Out
The OBBB will eliminate the ICR, PAYE, and SAVE plans by July 1, 2028. Anyone with these types of loans will need to switch before this date, or the DoE will choose a new one for you (most likely RAP).
Here’s a quick recap:
- The Income-Contingent Repayment (ICR) plan was an option where you’d pay the lesser of (1) what you would pay on a repayment plan with a fixed monthly payment over 12 years, adjusted based on your income, or (2) 20% of your discretionary income, divided by 12. ICR was the first and oldest IDR plan introduced in July 1994 after the passing of the Omnibus Budget Reconciliation Act of 1993.
- The Pay as You Earn (PAYE) plan gave you the option of paying 10% of your discretionary income, divided by 12, capped at the 10-year Standard Repayment amount. PAYE was introduced on December 21, 2012, under the Obama administration, following the economic hardship of the Great Recession.
- The Saving on a Valuable Education (SAVE) plan is the youngest IDR option introduced by the Biden Administration in August 2023, after their attempt to forgive student loans was opposed. Unfortunately, SAVE was also heavily contested and eventually blocked by a federal appeals court. This, in turn, forced millions of borrowers into involuntary administrative forbearance. As of Dec. 9, 2025, the DoE reached a proposed settlement agreement with the state of Missouri that, once approved, will officially dissolve SAVE.
IBR Remains in Effect
One IDR option that will continue to exist is the Income-Based Repayment (IBR) plan. However, this will only apply to loans disbursed before July 1st, 2026.
According to the DoE, borrowers no longer need to have a “partial financial hardship” to qualify for IBR. Payments will be calculated as follows:
- Those who borrowed before July 1, 2014: The IBR Plan monthly payment amount calculation is based on 15% of a borrower’s discretionary income, with a 25-year repayment period.
- Those who first borrowed on or after July 1, 2014, or had no outstanding balance at the time they received a new loan on or after that date: The IBR Plan monthly payment amount calculation is based on 10% of a borrower’s discretionary income, with a 20-year repayment period.
Monthly payment amounts will continue to be capped at an amount equivalent to the Standard Repayment Plan with a 10-year repayment period.
Second Chance for Rehabilitation
If your loan is in default, then according to the OBBB you’ll now get not one but two chances for rehabilitation. Previously, the DoE only allowed one opportunity.
The rehabilitation process entails contacting the loan servicer to formally establish a nine-month repayment plan within ten consecutive months. These payments are generally based on 10% to 15% of the borrower’s discretionary income.
Student loan rehabilitation is incredibly important because it may also help stop collection efforts and restore eligibility for federal student aid in the future.
It can also lift the default status on your credit report, although it should be noted that the missed payment history will remain on record.
Going Forward
If you’re feeling the financial squeeze lately, then you may have mixed feelings about this news. Regardless, the time to start planning on how you’ll repay your loans and get your budget in order is now.
Review each of these plans and determine which one is the better fit. While the standard plan and RAP will most likely lead to higher payments than you may be paying right now, you still have a choice. So, weigh the pros and cons of each carefully before making your selection.
Featured image credit: Unsplash
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