The Department of Education has finalized a new rule that will reshape how borrowers take on debt and repay it, with major implications for default rates and collection activity. The changes, which take effect beginning July 1, introduce new borrowing limits, eliminate certain repayment options, and establish a new income-driven repayment framework, while also making targeted updates to the loan rehabilitation process.
At a high level, the final rule is designed to simplify what the Department describes as a “confusing patchwork” of repayment options and to curb what it sees as excessive borrowing in higher education. The rule implements provisions from the Working Families Tax Cuts Act and introduces a new Repayment Assistance Plan alongside a Tiered Standard repayment option, while phasing out existing income-contingent repayment plans.
The changes also place new limits on borrowing, including eliminating the Grad PLUS program and establishing annual and lifetime caps for graduate and professional students. Institutions will also be given more authority to set program-level borrowing caps tied to expected outcomes.
On the repayment side, the new Repayment Assistance Plan removes certain protections that previously excluded a portion of income needed for basic living expenses from payment calculations. According to advocates, this shift could increase monthly payments for lower-income borrowers. The rules also sunset economic hardship and unemployment deferments for new borrowers and extend the timeline for loan forgiveness under income-driven repayment from 20 to 30 years.
At the same time, the Department has made changes to the default and rehabilitation process that could impact recovery strategies. Borrowers will be allowed to rehabilitate defaulted loans twice instead of once beginning in 2027, and a new streamlined process will allow borrowers to use tax data to verify income. Borrowers will also be able to enroll in an income-driven repayment plan at the same time they rehabilitate a loan, which is intended to reduce the risk of redefault.
The Department states that the rule is intended to improve program sustainability and reduce long-term taxpayer costs, projecting significant reductions in outstanding student loan balances over time.
