Navigating Recent Changes to Student Loans

The One Big Beautiful Bill Act (OBBBA) made several key changes affecting those with federal student loans or pursuing this option in the future. This has been a highly debated topic recently as approximately 40 million Americans hold loans totaling $1.6 trillion in debt.

Now Only Two Plans: Rap and IBR

The only two plans going forward will be the Repayment Assistance Plan (RAP) and the Income-Based Repayment (IBR) plan. Going away are the Income-Contingent Repayment (ICR), Pay As You Earn (PAYE) and Saving on a Valuable Education (SAVE) plans which will be phased out by 2028. Borrowers will be able to review which plan is best for them and switch between these two remaining plans in the upcoming months.

The new RAP will feature 30-year repayment plans versus the current repay­ment plans of 20 or 25 years, which could ultimately lead to lower monthly payments. This will debut July 1, 2026, for existing or new borrowers.

Student Loan Forgiveness

Students who had their debt forgiven from the Student Loan Relief Act in 2021 did not receive an extension of that forgiveness with the recent tax bill. Therefore, this new debt cancellation may be taxable beginning in 2026, depending on the type and nature of the existing loan.

Due to recent lawsuits, the U.S. Department of Education has indicated that borrowers who were attempting to enroll in a new IBR plan and were unable to do so by the end of 2025, should be shielded from federal tax liability even if the enrollment into one of the new repayment programs is delayed until 2026. The Department of Education has indicated there will be the removal of the partial hardship requirement that existed in the past in order to have an IBR plan.

Borrowers who receive loan forgiveness on federal student loans (as part of an IBR plan) generally won’t face a taxable event as long as they have been following certain federal programs such as Public Service Loan Forgiveness (PSLF), Teacher Loan Forgiveness (TLF), Perkins Loans for education/healthcare or similar federal programs. There will likely be no 1099-C as the loan forgiveness will still be classified as tax-exempt.

Borrowers should also review their state-specific rules regarding tax-exempt loan forgiveness. For example, Arkansas, Indiana, Mississippi, North Carolina and Wisconsin tax the PSLF. Some of these states do not conform to federal tax rules. New Jersey, New York and Pennsylvania all appear to be conforming with federal rules for 2026.

Other types of loans, such as employer or private loans, could create a taxable event for the borrower — and the borrower could receive a 1099-C in 2026. Refinancing federal loans into private ones may offer a lower interest rate, but it can mean losing access to certain federal forgiveness or repayment programs, which could affect the tax outcome.

Borrowers may be able to reduce or avoid tax liability by claiming the insolvency exclusion (IRS Form 982), negotiating an offer in compromise (IRS Form 656) or setting up a payment plan (IRS Form 9465) of up to six years.

Parent Plus Loan Changes

Parent PLUS loans will be subject to new caps beginning July 1, 2026.  There will be a legacy provision for current borrowers. The new annual cap is $20,000 per student per year with an aggregate limit of $65,000 per student total. Graduate PLUS loans are eliminated beginning July 1, 2026. Graduate and professional students will have to use either private loans or the Direct Stafford Loans with annual and lifetime caps. The caps are $20,500 per year for graduate students and $50,000 per year for professional students with lifetime caps of $100,000 for graduate students and $200,000 for professional students. A new federal borrowing limit of $257,000 has been established.

These changes create many financial planning scenarios to be mindful of in 2026 and beyond.