Back-to-school season is here, making it the perfect time to unpack sweeping changes to college funding, student loans, and new ways families can maximize college savings. As students prepare for a new academic year, parents, grandparents, and graduates alike should take note—these updates will shape how education is funded and financed in the years ahead. So grab your pencils and notebooks: class is in session, and the new rules are set to make a major impact.
The One Big Beautiful Bill Act (OBBBA), signed into law in July 2025, includes multiple provisions that affect higher education. The number and magnitude of the college funding changes could have been the subject of a standalone bill. Even if you’re past your college years (or college funding years), the provisions of the bill could still have an impact on your finances for years to come.
Key changes in the bill include new borrowing limits for students and parents under federal loan programs, streamlined student loan repayment plans, stricter rules on the ability of borrowers to pause student loan repayment, the promotion of workforce training programs, expanded qualified expenses for 529 plans, and an increased endowment tax on wealthy colleges and universities, among other items.
New borrowing limits under federal loan programs
The legislation imposes new borrowing caps on Parent PLUS Loans and Direct Loans and eliminates the Grad PLUS Loan program. These changes take effect July 1, 2026, unless otherwise noted.
Parent PLUS Loans
Currently, parents can borrow up to the full cost of their child’s undergraduate education, minus any financial aid received. Under the new law, Parent PLUS Loans will have an annual limit of $20,000 and a total limit of $65,000 per dependent student.
There is a three-year grace period on the new borrowing limits for parents who have borrowed under this program before June 30, 2026 — essentially allowing parents of current undergraduate students to continue borrowing up to the full cost of college if they need to.
Grad PLUS Loans
The Grad PLUS Loan program, which allows graduate students to borrow up to the full cost of their education (minus any aid received), has been eliminated.
It will be replaced with graduate loans under the existing federal Direct Loan program, but with new loan limits: $20,500 per year and $100,000 total for graduate students and $50,000 per year and $200,000 total for professional students (e.g., medicine, law). These new limits do not include undergraduate loans (current graduate student Direct Loan limits are $20,500 per year and $138,000 total).
The new law allows current graduate and professional students to continue borrowing under the current Grad PLUS Loan program during their remaining schooling or for three years, whichever is less, provided they are enrolled in a graduate or professional program as of June 30, 2026, and they have received at least one loan under the Grad PLUS program.
Direct Loans
There is a new lifetime student loan borrowing cap of $257,500 — this limit applies to undergraduate and graduate loans, not Parent PLUS Loans.
Loan Planning Tips
Review New Loan Limits
Carefully project borrowing needs, as Parent PLUS and new Direct Loan limits are much stricter; plan for out-of-pocket costs to avoid surprises.
Time Borrowing Strategically
If eligible, use the three-year grace period to maximize old borrowing rules before caps take effect, especially for parents or graduate/professional students already in school.
New student loan repayment plans and hardship rules
The legislation significantly alters the landscape of federal student loan repayment programs. The Saving on a Valuable Education (SAVE) Repayment Plan, the Pay As You Earn (PAYE) Repayment Plan, and the Income Contingent Repayment (ICR) Plan will be phased out and eliminated by July 1, 2028. Borrowers currently enrolled in one of these plans must transition to a new repayment plan by July 1, 2028, as described below.
Additionally, as of July 1, 2026, the legislation introduces two new repayment plans: the Standard Repayment Plan and the Repayment Assistance Plan.
Standard Repayment Plan
Under this plan, borrowers pay a fixed amount each month over a specified period. Before July 1, 2026, payments were made over a 10-year period. Under the Standard Repayment Plan, the amount of time a borrower has to repay a student loan depends on the loan balance:
· Less than $25,000 — 10 years
· $25,000 to less than $50,000 — 15 years
· $50,000 to less than $100,000 — 20 years
· $100,000 and over — 25 years
There is no prepayment penalty; borrowers can pay off their loans early without incurring any additional fees or penalties.
Repayment Assistance Plan
The Repayment Assistance Plan (RAP) is a new income-based repayment plan that bases monthly loan payments on a borrower’s adjusted gross income (AGI). This plan is only available to undergraduate and graduate students, not parents. Under RAP, a borrower’s monthly payment will be set as follows based on AGI:
· $10,000 or less — flat payment of $10 per month ($120 per year)
· $10,001 to $20,000 — 1%
· $20,001 to $30,000 — 2%
· $30,001 to $40,000 — 3%
· $40,001 to $50,000 — 4%
· $50,001 to $60,000 — 5%
· $60,001 to $70,000 — 6%
· $70,001 to $80,000 — 7%
· $80,001 to $90,000 — 8%
· $90,001 to $100,000 — 9%
· $100,001 and over — 10%
Payments are applied first to interest, then to fees, and then to principal. If the required payment is less than the accrued interest, the additional interest is waived. After 30 years of on-time payments, all remaining debt is forgiven (current income-based plans forgive remaining debt after 20 or 25 years).
For single borrowers, only the borrower’s AGI is used to determine the monthly payment. For married borrowers, joint AGI is used if the couple files a joint federal income tax return; otherwise, for married borrowers who file separate income tax returns, only the borrower’s AGI is used. For borrowers with dependents, the monthly payment will be reduced by $50 for each dependent listed on a borrower’s federal income tax return.
Payments made under RAP qualify for the federal Public Service Loan Forgiveness (PSLF) program.
Which repayment plan applies?
Borrowers who obtain new loans on or after July 1, 2026, will repay them under either the new Standard Repayment Plan or the Repayment Assistance Plan.
Existing borrowers who are currently enrolled in the SAVE, PAYE, or ICR Plan must transition to a new repayment plan by July 1, 2028. They can choose either the federal government’s remaining income-driven plan, called the Income-Based Repayment (IBR) Plan, or the new Repayment Assistance Plan. More information is expected to be available from the Department of Education in the coming months.
Repayment Planning Tips
Repayment Selection Preparation
Existing borrowers in SAVE, PAYE, or ICR should evaluate future repayment plan options and anticipate being switched to the new Repayment Assistance or Income-Based Repayment plan by 2028.
Income and Dependent Planning
Use the RAP’s dependent deduction ($50/month per dependent) and joint AGI strategies to lower student loan payments for families
Changes to deferment and forbearance rules
The new law tightens the ability of borrowers to pause repayment on their federal student loans.
· New deferment rule: Starting July 1, 2027, the economic hardship deferment and the unemployment deferment will be eliminated.
· New forbearance rule: For new loans issued July 1, 2027, and later, a forbearance (a payment pause due to short-term financial difficulty) will be limited to a single nine-month pause every 24 months.
Expanded workforce training focus
The legislation seeks to encourage non-traditional post-secondary education paths in two ways.
Workforce Pell Grant
Starting with the 2026–2027 school year, a new Workforce Pell Grant will be available to students enrolled in accredited, short-term (8–15 weeks in duration) job-focused programs, such as certificate programs at community colleges. Funding will be pro-rated based on the program’s length, meaning a Workforce Pell Grant will be less than a standard Pell Grant (the maximum standard Pell Grant for the 2025–2026 year is $7,395).
Planning Tip
Consider Workforce Programs
Take advantage of new Workforce Pell Grants for short-term, career-focused programs; these may offer a quicker return on investment versus traditional degrees.
Expanded qualified expenses for 529 plans
Starting with the 2026 tax year, the new law expands the list of qualified 529 plan expenses to include tuition, fees, books, and expenses for workforce credentialing programs (as defined in the law as a “recognized post-secondary credential program”). This includes programs that may not have fit under the existing vocational or apprenticeship allowed use cases.
In addition, starting in 2026, the limit on K-12 qualified expenses has been increased from $10,000 to $20,000 per year and additional expenses are now qualified at the K-12 level, including instructional materials (both hard copy and online), tuition for tutoring or educational classes outside of school, fees for dual enrollment at an institution of higher education, standardized test fees, and educational therapies for students with disabilities (e.g., occupational therapy, speech therapy).
The new law also permanently allows rollovers from a 529 plan to an ABLE account (a tax-advantaged savings account for individuals with disabilities).
Planning Tip
Plan your 529 withdrawals to cover expanded credentials, increased K-12 expenses, and rollovers to ABLE accounts for dependents with disabilities, starting in 2026.
Expanded endowment tax on wealthy colleges
The new law increases the excise tax on the endowments of wealthier colleges and universities. Currently, private schools with at least 500 tuition-paying students and an endowment of at least $500,000 per student are subject to a 1.4% excise tax on net investment income from their endowments. This tax was enacted as part of the Tax Cuts and Jobs Act of 2017.
Under the new law, starting in tax year 2026, colleges with more than 3,000 tuition-paying students will pay excise tax on net investment income from their endowments based on an “endowment dollars per student” model as follows:
· $500,000 to $750,000 endowment per student — 1.4%
· $750,001 to $2,000,000 endowment per student — 4%
· Over $2,000,000 endowment per student — 8%
Why should you care? Because many colleges rely on income from their endowments to fund student financial aid programs, colleges and universities impacted by this new endowment tax could potentially reduce their aid under these programs.
Planning Tip
Watch for changes to college financial aid at well-endowed institutions; review or ask how new taxes could affect grants and scholarships at target schools.
Miscellaneous provisions
The legislation includes several other education-related provisions, including:
· Pell Grant eligibility: The new law adjusts the way Pell Grant eligibility is determined based on the Student Aid Index calculation in the FAFSA (Free Application for Federal Student Aid) and on the amount of private full-ride scholarships received, which is expected to result in fewer students qualifying for a traditional Pell Grant. This adjustment takes effect starting with the 2026–2027 school year.
· FAFSA changes on small businesses and family farms: Starting July 1, 2026, the FAFSA will no longer count the net worth of small businesses (100 employees or fewer), family farms, and commercial fishing businesses when calculating aid eligibility. This change will take effect with the 2026–2027 school year.
· Employer-provided student loan repayment assistance: The legislation permanently extends the $5,250 tax-free employer-provided student loan repayment assistance starting with the 2026 tax year. The $5,250 threshold will be indexed for inflation starting in 2027.
· Claiming the American Opportunity Tax Credit and Lifetime Learning Credit: Starting with the 2026 tax year, taxpayers who claim either of these education tax credits on their federal income tax return must include their Social Security number and, where applicable, the college’s employer identification number (EIN).
Planning Tips
FAFSA Strategy for Families with Small Businesses/Farms
Beginning 2026-27, families with small businesses or farms may see more favorable federal aid calculations—you may want to revisit FAFSA filings to optimize eligibility.
Employer Loan Repayment
Seek employers offering tuition or student loan repayment benefits, with up to $5,250 annually now tax-free and indexed for inflation.
Track New Documentation Needs
Prepare to provide Social Security numbers and college EINs when claiming education credits starting in 2026.
Conclusion
There’s no doubt that the sweeping changes to college funding will affect most families and students returning to school, as well as some of those already out of school. Understanding and adopting the included tips will help families and students adjust to the tax law’s new rules, prepare for several less generous provisions, and take advantage of other expanded education benefits.
Sam H. Fawaz CFP®, CPA, PFS is the President of YDream Financial Services, Inc., a fee-only investment advisory and financial planning firm serving the entire United States. If you would like to review your current investment portfolio or discuss any other retirement, college, tax, or financial planning matters, please don’t hesitate to contact us or visit our website at http://www.ydfs.com. We are a fiduciary financial planning firm that always puts your interests first, with no products to sell. If you are not a client, an initial consultation is complimentary, and there is never any pressure or hidden sales pitch. We begin with a thorough assessment of your unique personal situation. There is no rush and no cookie-cutter approach. Each client’s financial plan and investment objectives are unique.
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