Background
For decades, the federal government has been the primary source of financial aid for students pursuing post-secondary education. Authorized under Title IV of the Higher Education Act of 1965 (HEA), these programs have evolved to include a mix of grants, work-study programs, and student loans. Federal loans are a cornerstone of college financing for millions of families. Key loan types include Federal Direct Stafford Loans and PLUS Loans for parents of undergraduate students (Parent PLUS) or PLUS loans for graduate or professional student (grad PLUS).
The Department of Education has historically offered a variety of repayment plans providing borrower’s multiple paths to repayment. These include fixed payment plans (Standard, Graduated, Extended) and several Income-Driven Repayment (IDR) plans. IDR plans include the Income-Contingent Repayment (ICR) plan, Income-Based Repayment (IBR) plan, Pay As You Earn (PAYE) plan, and Saving on a Valuable Education (SAVE) plan. These IDR plans were designed to make payments more affordable by basing the monthly amount on a borrower’s income and family size. These plans typically offer loan forgiveness after 20 or 25 years of qualifying payments.
Taxability of loan forgiveness is a key consideration when choosing loans and loan repayment options. Generally, if an individual is responsible for making loan payments and the loan is subsequently forgiven, taxpayers must include the amount that was forgiven in their gross income. However, IRC Sec. 108(f) provides exceptions, excluding from gross income student loan discharges that occur due to reasons such as bankruptcy, insolvency, death or total and permanent disability, and for borrowers working in certain professions for a period of time. In addition to these statutory provisions, for student loans discharged between 2021–2025, the American Rescue Plan Act of 2021 (ARPA) temporarily created an income exclusion for most student loans discharged, regardless of the reason for forgiveness.
Programs like the Public Service Loan Forgiveness (PSLF) program were established to encourage careers in public service by offering loan forgiveness after 10 years (120 qualifying payments) of full-time employment with a qualifying employer. Unlike forgiveness of student loan debt under most scenarios, the remaining balance of a loan forgiven under the PSLF would be excluded from gross income.
The 2025 Act: A New Era for Student Loans
The 2025 Act, known as the One Big Beautiful Bill (OBBB), fundamentally overhauls the federal student loan landscape for loans made on or after 07/01/26. The changes impact nearly every facet of student lending, including loan eligibility, loan limits, repayment options, and taxability of loan forgiveness. Most of these changes take effect for the 2026–2027 academic year or for loans disbursed on or after 07/01/26.
The 2025 Act sunsets most of the existing IDR plans. Effective 07/01/28, the existing ICR, PAYE, and SAVE plans will be repealed. The IBR will still be available for loans made prior to 07/01/26 only; new loans made after that date will not be eligible for IBR. Borrowers currently in ICR, PAYE, or SAVE plans must select a new plan (updated IBR, new standard plan, or new Repayment Assistance Plan) by 07/01/28 or they will be automatically enrolled in the new Repayment Assistance Plan (RAP).
Note: Regarding SAVE plans, following a proposed joint settlement agreed between the ED and the State of Missouri in December 2025, the SAVE repayment plan is ending, pending final court approval. As a result, the ED will deny all pending SAVE applications, enroll no new borrowers, and require existing SAVE borrowers to switch to a different IDR plan. For borrowers who were placed in a general forbearance under the SAVE plan, interest began accruing on their loans again on 08/01/25, and this period does not count toward IDR or PSLF qualified payments (Department of Education Press Release, 12/09/25). Practitioners should continue to monitor for final guidance.
Repayment Assistance Plan (RAP): This new plan was introduced under the 2025 Act. For loans made after 07/01/26, the RAP will be the only IDR plan available. It features monthly payments based on a sliding scale of the borrower’s Adjusted Gross Income (AGI), a $10 minimum monthly payment, and loan forgiveness after 360 qualifying payments (30 years). Additionally, for borrowers enrolled in RAP, when a borrower’s required payment is insufficient to cover the month’s interest, the unpaid interest is not added to the loan balance, limiting negative amortization. In addition, RAP may provide a capped “principal match” subsidy that can reduce principal in certain low-payment months.
Updated Income-Based Repayment (IBR) Plan: The IBR plan will remain, but only for loans made prior to 07/01/26. The requirement for a borrower to demonstrate a partial financial hardship to enroll has been eliminated.
New Tiered Standard Repayment Plan: For loans made after 07/01/26, a new tiered standard plan replaces the old 10-year standard plan. Repayment terms will be 10, 15, 20, or 25 years, based on the borrower’s total loan balance.
A significant change to student loans under the 2025 Act is the imposition of new, stricter borrowing limits, which are tied to new, narrower definitions of “graduate” and “professional” students. These new loan limitations apply to new loans made on after 07/01/26. Borrowers who already had loans previous to this date will not be subject to this new limitation and will be allowed to continue borrowing under the previous borrowing limits for the remainder of their program or for up to three years, whichever comes first.
A professional student is narrowly defined as one enrolled in a program awarding a professional degree (e.g., M.D., J.D., Pharm.D.) that generally is at the doctoral level, requires at least six years of postsecondary education, and requires licensure to practice. A graduate student is anyone in a post-baccalaureate program that does not award a professional degree (e.g., most Masters degrees).
The 2025 Act terminates the Grad PLUS loan programs for all new borrowers for academic years beginning on or after 07/01/26. Students with Grad PLUS loans in place before this date will be allowed to continue borrowing for the remainder of their program or for up to three years, whichever comes first.
Annual loan limits are now reduced in direct proportion to a student’s enrollment status if they are enrolled less than full-time.
The 2025 Act made permanent the exclusion from gross income any student loan amounts discharged on account of the student’s death or total and permanent disability under IRC Sec 108(f)(5). However, the 2025 Act did not extend the temporary, broader income exclusion for student loan discharges that was enacted as part of the American Rescue Plan Act of 2021 (ARPA). That provision, which excluded most student loan debt discharged between 2021 and 2025 from a taxpayer’s gross income, has expired. Consequently, loan balances forgiven under programs like the new RAP after 30 years will generally be treated as taxable income to the borrower unless another specific exclusion applies.
A final rule issued by the ED on 10/31/25 amends the definition of qualifying employer for PSLF. Effective 07/01/26, organizations that “engage in illegal activity such that it has a substantial illegal purpose” will be excluded from being qualifying employers. Borrowers working for these newly excluded organizations will receive full credit for work performed up until the effective date of the determination. Additionally, the 2025 Act amended the PSLF to include the new RAP as an accepted repayment plan whose payments count towards loan forgiveness.
Tax and Planning Implications for Practitioners
The sweeping changes introduced by the 2025 Act create significant planning considerations for taxpayers and their advisers. A critical tax-related change is the expiration of the broad income exclusion for student loan forgiveness. This means that starting in 2026, any loan forgiveness received by a borrower under a non-qualifying program, including forgiveness under IDR plans like the new RAP after 30 years, will be treated as taxable cancellation of debt income, unless a specific exclusion applies. Practitioners must advise clients in or approaching repayment that future forgiveness under IDR plans may be taxable.
The new, restrictive definitions of professional and graduate students are arguably one of the most impactful changes for families planning for higher education. The higher $50,000 annual and $200,000 aggregate limits are reserved for a very narrow set of doctoral-level programs. Per the definitions outlined in the ED proposed rule from 01/30/26, many Master’s degree programs (e.g., MBA, M.Ed) and even some clinical doctorates (e.g., DPT in physical therapy or DNP in nursing) will fall under the graduate student category, limiting borrowers pursuing these degrees to the lower $20,500 annual and $100,000 aggregate limits. This is an important distinction for financial planning.
The transition to the new repayment plans also requires careful guidance. For new borrowers after 07/01/26, the choice is simple: the new Tiered Standard Plan or the RAP. For existing borrowers, the situation is more complex. Those in now-sunsetting plans (ICR, PAYE, SAVE) must actively choose a new plan by 07/01/28. Practitioners should advise clients who need to choose a new IDR plan to evaluate their options between the updated IBR plan and the new RAP.
Conclusion
The 2025 Act, coupled with recent court actions regarding the SAVE plan, marks a major turning point in the federal student loan system. Key takeaways include the restructuring of repayment options; tighter borrowing limits tied to revised student eligibility definitions; new criteria that can disqualify certain employers from PSLF; and substantial tax consequences for forgiveness of debt as the ARPA tax exclusion sunsets. Proactive planning will be essential for families to navigate this new landscape and avoid costly surprises related to both education financing and future tax liabilities.
Editor’s Note: The full article presented above is available in the Practitioner’s Tax Action Bulletin, as National Tax Advisory Memo (NTA-1351), first published in Issue 6 Dated March 24, 2026, along with other valuable tax practitioner articles. Contact Our Sales Team for a Subscription to Checkpoint’s bimonthly Practitioner’s Tax Action Bulletin, which is available in print, and online or to add Thomson Reuters Planner CS to your advisory toolkit.
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