2025 Student Loan Shake-Up: SAVE Plan Lawsuit, New RAP Repayment Rules & Major Borrowing Caps for Future Students
Student loan updates as it relates to this bill can be broken down into two categories.
Existing borrowers.
New borrowers.
For existing borrowers, those who already have student loans, the headliner news is that this legislation limits repayment options.
It’s getting rid of income contingent repayment (ICR), phasing out pay as you earn (PAYE) between 2026 - 2028, and saving on a valuable education (SAVE).
This then leaves only income driven repayment (New and Old IBR) and introduces a new student loan student loan repayment option called repayment assistance plan (RAP).
The short and sweet on the RAP plan is that:
Payments will be a minimum of $10 scaling upwards to 10% of AGI for the prior year for those with less than $100k income.
There’s a $50 per month deduction for any dependents on your taxes. There is no percentage of the poverty line deduction to form discretionary income like prior income driven plans.
PSLF is still alive at the 10-year mark but non-PSLF forgiveness in the private sector is 30 years, not the 20-25 we’ve seen with prior income driven repayment plans.
Unpaid interest is subsidized (similar to SAVE) & not added to your loan balance and you may even see a principal reduction up to $50 even if your payment does not cover the interest.
You can file taxes separately to reduce income on RAP.
It looks like borrowers will be forced on the RAP plan after July 1, 2026.
For new borrowers, the bill is imposing caps on the amount of federal student loans someone can borrow starting July 1, 2026:
Graduate loans = $100,000 cap for masters degrees & $200,000 for professional degrees. Today, borrowers can borrow $20,500 per year.
Parent PLUS loans = $20,000 annually and $65,000 per child (today, borrowers can borrower the full cost of attendance in federal loans)
Graduate PLUS loans = being eliminated entirely. Today, borrowers can borrower the full cost of attendance in federal loans.
This will force borrowers to consider alternative means of funding for college planning - very likely to either private loans or extending their education from 4 years to potentially 5 years and beyond to be able to afford the cost of attendance (assuming college institutions don’t decrease prices - which I don’t see happening immediately unless demand swiftly falls off).
This is a dramatic adjustment in how historically college has been paid for.
Historically, undergraduates borrowed alongside a parent (along with accumulated savings & cash flow) to get them through undergraduate, then they were able to take advantage of the Graduate PLUS program to borrow the full cost of attendance in their post-grad years.
My concern here is that this leads to an increase in private lending.
Private lenders have more stringent lending terms and this likely won’t be enough for borrowers to pay the yearly cost of attendance.
This will lead to those seeking private loans to then use sub-prime markets to borrow at very high rates which has the potential to cripple borrowers unless they have substantial income post grad (& during school as these loans don’t have a grace period like federal loans do).
Potentially, but not hopefully, creating a massive future default in aggregate student loans borrowing fueled by both someone's desire to get through school to obtain a degree & a parent’s desire to fund this for their desire to get their child through college.
To build on this - today, from my experience talking with borrowers, I think many feel they’re getting robbed.
Institutions made a promise that if they just got a college education, then the public and private sector workforce would take care of them with higher income than if they had not gone to school and they’d be able to live a better life.
Today, that is not the case.
Borrowers are strapped with enormous student loan debts that limit their free cash flow.
Pair that with increased asset prices (& increased interest rates) pushing the ability for many to purchase a home becoming out of reach for many.
This is more the doom & gloom outcome - but it’s a reality being experienced by a third of borrowers.
Back to student loan updates - revisiting borrowers who were on the SAVE plan, this was the repayment plan with the lowest repayment cost.
Today, the SAVE plan is being sued by the state of Missouri and Kansas challenging the lower payment options and for accelerated forgiveness timelines for small loan balances alongside interest subsidies.
The lawsuit is currently stuck in the 8th Circuit Court of Appeals where in February 2025 upheld a preliminary injunction blocking the SAVE plan.
Today borrowers cannot make a payment on the SAVE plan but interest is (was) subsidized.
As of recently, the Department of Education came out and stated that starting August 1st the SAVE plan interest subsidy was going away.
This now means that you cannot make a payment on the SAVE plan and your interest is accruing & if you leave the SAVE plan, you cannot hop back on the SAVE plan.
This is creating a fork for borrowers on the SAVE plan:
Do you stay on the plan and wait for an outcome from the 8th Circuit Court of Appeals or do you jump ship to another income driven repayment plan?
I feel more confident than not given the current administration that the current SAVE plan will not be upheld in courts.
This could inform a decision to jump ship to another income driven repayment option.
The good news here is this means you can start making payments that will count towards long-term forgiveness.
The bad news is that you’ll enter back into repayment at a repayment amount higher than what you may have expected.
COVID forbearance essentially lasted until September 30, 2024 (close to 5 years) where borrowers did not have to make payments & many borrowers didn’t.
They kicked the repayment can down the road and allocated capital elsewhere.
Now with repayment looming, borrowers are facing the reality of what fitting in student loan repayments will look like into their financial picture.
Staying on the SAVE plan could make sense for a small number of borrowers who believe that the SAVE plan could be upheld, they have significant debt already and couldn’t afford another payment, or are buying time to earn higher income now then to retire upon repayment to reduce their repayment amount and maintain their desired retirement lifestyle.
I suspect that this is how the student loan world will be for now.
In the event we have a democrat in office in future years, I wouldn’t be surprised if repayment plans or the RAP plan is adjusted to reflect more favorable student loan repayment options.