On July 1, 2026, five separate changes to the federal student loan system take effect at once. The Biden-era SAVE repayment plan officially ends. New borrowing limits and a new repayment plan created by last year’s reconciliation law begin. Interest rates rise for the 2026-27 academic year. Grad PLUS loans disappear for new borrowers. And a tax break that made loan forgiveness tax-free already expired in January, meaning anyone who gets debt forgiven from here forward owes the IRS on it. None of these changes are projections. Each one is now in effect or about to be.
The SAVE Plan Borrowers Have to Leave
About 7.5 million borrowers were enrolled in the SAVE Plan, the Biden administration’s income-driven repayment program, before courts ruled it unlawful. Starting July 1, federal loan servicers began sending notices instructing those borrowers to exit SAVE and enroll in a legal repayment plan within 90 days. Borrowers who do not actively choose a new plan are automatically moved into either the Standard Repayment Plan or a new Tiered Standard Plan, both of which can carry higher monthly payments than SAVE did, depending on income and balance.
A New Plan, With a New Catch
The same reconciliation law that ended SAVE created its replacement: the Repayment Assistance Plan, or RAP, which bases payments on income and number of dependents and is also available starting July 1. The Department of Education describes RAP as protecting borrowers who make full, on-time payments from runaway interest, while still requiring progress toward the principal balance. Unlike SAVE, which the Biden administration used executive authority to create and which courts later found exceeded that authority, RAP exists in the statute Congress passed, which is part of why the administration is positioning it as the legally durable option going forward.
Smaller Loans, Pricier Loans
New borrowing caps also start July 1. Parent PLUS loans are now limited to $20,500 per year per dependent child, with a $65,000 lifetime cap per child, down from no statutory cap previously. Graduate students taking out Direct Unsubsidized Loans are capped at $20,500 per year and $100,000 over a lifetime, except for professional degrees like medicine and law, which carry a $50,000 annual and $200,000 lifetime limit. A new combined lifetime cap of $257,500 applies across all federal loan types. At the same time, interest rates for loans first disbursed in the 2026-27 academic year are rising: undergraduate Direct Loans go to 6.52 percent from 6.39 percent, graduate Direct Unsubsidized Loans rise to 8.07 percent from 7.94 percent, and Parent PLUS loans climb to 9.07 percent from 8.94 percent. Borrowers can take out less money, at a higher price.
Grad PLUS Goes Away
Grad PLUS loans, which graduate and professional students have used for decades to cover costs above what Direct Unsubsidized Loans allow, are eliminated for new borrowers starting July 1, 2026. Students already enrolled in a program and already using Grad PLUS get a transition window of up to three academic years before the change applies to them. After that, graduate and professional students needing to borrow above the new federal caps will have to turn to private lenders, which do not offer the same income-driven repayment or forgiveness protections as federal loans.
Forgiveness Now Comes With a Tax Bill
A separate change took effect earlier this year and compounds the rest. A temporary federal tax exemption for forgiven student debt expired January 1, 2026. Borrowers who reach the end of an income-driven repayment plan and have their remaining balance forgiven now owe federal income tax on that forgiven amount, treated as taxable income in the year it is canceled. Public Service Loan Forgiveness is unaffected and remains tax-free, but the broader population relying on income-driven repayment to eventually have their debt wiped out will now receive a tax bill instead.