Two of the more complicated aspects of federal student loan repayment are changing, so pull out your exit counseling materials and get ready to edit!
Income-driven Loan Repayment
Income-based/income-driven loan repayment programs allow borrowers with limited income to pay a monthly amount based on their income rather than the outstanding loan amount. Under some programs, the monthly amount could be as low as $0 per month. Depending on the program, any unpaid balance will be forgiven after 20 to 30 years. Today there are three viable options, Income-Based Repayment (IBR); Income-Contingent Repayment (ICR); and Pay As You Earn (PAYE). The Saving on Valuable Education (SAVE) plan created under the Biden administration replaced the Revised Pay As You Earn (REPAYE) program but was never fully implemented due to legal wrangling and was closed entirely by the Trump administration, leaving borrowers already in the REPAYE program and applicants to the SAVE plan in limbo.
The One Big Beautiful Bill Act (OBBBA) introduced a new income-driven plan known as the Repayment Assistance Plan (RAP) that will replace all the existing ones. Borrowers with eligible loans made prior to July 1, 2026, can still participate in the existing IBR program only (the others will be phased out by 2028). If consolidation into the Federal Direct loan program is required, the proceeds must be disbursed by June 30, 2026. Some facets of the existing IBR program will remain the same:
- The monthly payment amount is capped at the amount calculated based on the monthly payment under the standard, 10-year term.
- The percentage of discretionary income used to determine the monthly payment will continue to be 15% for loans made before July 1, 2014, and 10% for loans made on or after July 1, 2014.
- The repayment terms will continue to be 25 years for loans before July 1, 2014, and 20 years for loans made on or after July 1, 2014.
Changes made by the OBBBA include extending eligibility to those not demonstrating partial financial hardship and parent PLUS borrowers participating in the ICR program.
The RAP will be the sole income-driven program moving forward. It differs from existing programs in many ways.
- Monthly payments will be based on a percentage of Adjusted Gross Income (AGI) based on an earning bracket between 1% and 10%.
- There will be a minimum payment of $10 per month.
- After 30 years of repayment, any unpaid balance will be forgiven. The amount forgiven will be treated as taxable income for federal tax purposes. Depending on where the borrower resides, it may also be subject to state tax.
Public Service Loan Forgiveness (PSLF) Program
The Public Service Loan Forgiveness (PSLF) program is also changing. This program was implemented in 2007 to encourage college graduates to enter the public sector. Unlike the Income-driven/based repayment plans, loan forgiveness is granted after ten years of qualifying payments (120 payments). There are three requirements for a payment to be considered ‘qualified.’
- The loan being repaid must be an eligible loan. Only federal direct loans are eligible. Borrowers with loans in other federal programs must be able to consolidate them into a direct loan program to be eligible. Private educational loans or any other type of financing used to pay for college are not eligible.
- Payments must be made under a payment plan that will leave a balance to be forgiven. Typically, this means an income-driven/based repayment plan.
- The borrower must be a regular, full-time employee working for a qualified employer at the time the payments are made. A qualified employer is any government entity (federal, state, or local); non-profit agencies that are tax-exempt under section 501(c)(3) of the IRS code; and other non-profit agencies providing other qualifying public services.
The definition of qualified employer is changing, effective July 1, 2026. Employers will be disqualified if the Department of Education (ED) deems them to be participating in substantial illegal purpose include aiding and abetting violations of federal immigration laws, supporting terrorism or engaging in violence for the purpose of obstructing or influencing federal government policy, engaging in the chemical and surgical castration or mutilation of children in violation of federal or state law, engaging in the trafficking of children to another state for purposes of emancipation from their lawful parents in violation of federal or state law, engaging in a pattern of aiding and abetting illegal discrimination, and engaging in a pattern of violating state laws. ED published the final rule on October 31, 2025, along with public comments.
The good news is that otherwise qualifying payments will still count toward the 120 required even if a borrower’s employer is disqualified after July 1. The not so good news is that any additional payments will not be qualified until the borrower finds a new, qualifying employer. Additionally, there is concern expressed in the public comments that the criteria are too vague and could be defined differently based on political agendas. ED, however, disagrees with this concern and will not make any changes to the current wording.
When it comes to counseling students, it is important to share three important points:
- The specific eligibility requirements of the program are subject to change by Congress or, as in this case, an Executive Order by the President.
- PSLF, even with the tax-free (at least today) forgiveness component, may not be the least expensive repayment option for all borrowers otherwise meeting the eligibility requirements due to the need to pay for at least ten years.
- Due to points one and two above, it’s not the best idea to plan your career around getting your student loans forgiven.
Additionally, there are other ways besides PSLF for borrowers to get some help with loan repayment. There are dozens of loan repayment assistance programs offered by states, the military, health services, and others. Before PSLF, there was a Teacher Loan Forgiveness program and it still exists. It’s more restrictive than PSLF but only requires five years of service to earn the maximum forgiveness amount. You can find a comprehensive list of programs here. And don’t forget student loan repayment assistance is the hot new employee benefit many companies are offering.
We’ve said before that the only constant in the financial aid office is change and here we go again! Take out your red pen and start marking up your exit counseling talking points, so you are ready to share this information with your December graduates.
Are you sure your student loan entrance and exit counseling programs are compliant? If not, email us at info@heag.us to get feedback from our regulatory experts.
Sources:
https://studentaid.gov/announcements-events/big-updates
https://www.nytimes.com/2025/10/30/business/trump-student-loan-forgiveness-public-service.html
https://studentaid.gov/manage-loans/forgiveness-cancellation/public-service#qualifying-employment
