Major Student Loan Changes in 2025: What the New Budget Bill Means for Borrowers

Rae Kaplan, founder of Kaplan Law Firm, appears on WGN Radio 720 to discuss what the new budget bill means for borrowers.

Link to full interview → Attorney Rae Kaplan: How Trump Budget Bill Impacts Your Student Loans

The landscape of student loan debt is undergoing significant transformation in 2025, with new federal legislation introducing sweeping changes that will affect millions of current and future borrowers. In a recent interview, debt relief attorney Rae Kaplan provided crucial insights into how the newly passed budget bill will reshape student loan repayment, forgiveness programs, and borrowing limits.

Breaking News: Federal Student Loans Can Now Be Discharged in Bankruptcy

One of the most significant developments in student loan law has been largely overlooked by mainstream media. Contrary to popular belief, federal student loans can now be discharged through bankruptcy proceedings under new Department of Education guidelines. This represents a fundamental shift in how student debt can be managed for borrowers facing severe financial hardship.

According to Rae Kaplan, approximately 50% of cases involving federal student loan discharge through bankruptcy result in either complete elimination or partial reduction of the debt. This process requires litigation within the bankruptcy proceedings, but the success rate demonstrates that discharge is not only possible but increasingly common.

The Department of Education has issued new guidelines that make it easier for borrowers to demonstrate the undue hardship necessary for student loan discharge. This change addresses decades of misconceptions about the permanence of student loan debt and provides a crucial safety net for borrowers who have exhausted other options.

The Bankruptcy Process for Student Loans

The process involves several key steps that borrowers must navigate with legal assistance. First, borrowers must file for bankruptcy and specifically request discharge of their student loans as part of the proceedings. The court then evaluates whether the loans create an undue hardship using established legal criteria.

The success of these cases often depends on demonstrating that the borrower cannot maintain a minimal standard of living while repaying the loans, that their financial situation is likely to persist for the significant portion of the loan repayment period, and that they have made good faith efforts to repay the loans before seeking discharge.

This development is particularly significant for borrowers who took on substantial debt for degrees that did not lead to sufficient income to support repayment, or for those who have experienced major life changes such as disability, job loss, or other financial catastrophes that make repayment impossible.

The 2025 Budget Bill: What Changed and What Didn’t

The recently passed 900-page budget bill contains significant provisions affecting student loan borrowers, though many of the most restrictive measures were removed thanks to Senate parliamentarian rulings that required 60 votes for passage. This parliamentary procedure prevented several “draconian provisions” from becoming law, according to Kaplan.

Timeline for Implementation

The most important aspect of these changes is their timeline. The new provisions primarily affect borrowers who take out loans from July 1, 2026, and forward. This means current borrowers and those taking out loans in the 2025-2026 academic year will largely operate under existing rules.

For families with students already enrolled or planning to enroll before the 2026 deadline, there is a three-year grace period that allows them to take advantage of current loan limits and terms through 2028. This grace period is crucial for families planning their college financing strategy.

Impact on Current Borrowers

Existing borrowers can breathe a sigh of relief, as the legislation does not disrupt current repayment plans. Borrowers currently enrolled in Income-Based Repayment (IBR) plans, whether old or new IBR, can continue with their existing arrangements. The stability of these programs provides continuity for millions of borrowers who have structured their finances around predictable payment schedules.

The bill also preserves Public Service Loan Forgiveness (PSLF) in its entirety. This program, which forgives remaining loan balances after 120 qualifying payments for borrowers working in public service, remains unchanged and will continue to be available even for future borrowers under the new system.

New Repayment Structure: The RAP Plan

For borrowers taking out loans after July 1, 2026, the federal government is introducing a simplified repayment structure centered around the Repayment Assistance Program (RAP). This new plan replaces the complex array of income-driven repayment options currently available.

Under RAP, borrowers will pay 10% of their adjusted gross income toward their student loans, with calculations that consider marital status and dependents. For married borrowers, filing taxes separately may be advantageous to exclude spousal income from the payment calculation.

The RAP plan extends the forgiveness timeline from the current 25 years under IBR to 30 years. While this represents a longer commitment period, the plan includes an interest subsidy that prevents loan balances from growing during repayment. This subsidy addresses one of the most frustrating aspects of current income-driven plans, where borrowers often see their balances increase despite making regular payments.

Major Changes to Parent PLUS Loans: New Borrowing Limits

One of the most significant impacts of the 2025 budget bill affects Parent PLUS loans, which have historically allowed parents to borrow up to the full cost of attendance with minimal restrictions. Starting in 2026, new annual borrowing caps will fundamentally change how families finance higher education.

The New $20,000 Annual Cap

Beginning with students entering college in 2026, Parent PLUS loans will be capped at $20,000 per year. This represents a dramatic reduction from the previous system, which allowed parents to borrow the entire cost of attendance minus other financial aid received.

For context, many private universities charge $70,000 to $80,000 annually, while even public universities can cost $40,000 or more per year when including room, board, and other expenses. The $20,000 cap will leave substantial funding gaps that families will need to address through alternative means.

Grace Period for Current Families

Families with students already enrolled in college or those beginning in the 2025-2026 academic year receive a three-year grace period. This means they can continue borrowing under the current, higher limits through 2028, providing crucial transition time for financial planning.

This grace period is particularly valuable for families with multiple children in college or those who have already committed to expensive educational programs based on the availability of Parent PLUS funding.

Impact on Graduate School Borrowing

The legislation also affects graduate school borrowing, though specific details about graduate student loan limits were not fully outlined in the interview. Graduate students, who often rely heavily on federal loans to finance advanced degrees, will face new restrictions that could significantly impact their educational choices.

The Policy Rationale: Forcing Cost Reduction

The stated goal of these borrowing caps is to pressure colleges and universities to reduce their costs. The theory suggests that if families cannot access unlimited federal borrowing, institutions will be forced to lower their prices to maintain enrollment.

However, Kaplan expressed skepticism about whether this market pressure will actually result in lower college costs. Instead, she predicts that private lenders will enter the market to fill the funding gap, potentially offering loans at competitive rates but without the consumer protections and forgiveness options available with federal loans.

Private Lending as an Alternative

With federal borrowing restricted, families will increasingly turn to private student loans from companies like SoFi, Earnest, College Ave, Wells Fargo, and Discover. While these lenders may offer competitive interest rates—potentially around 5-6% compared to federal rates of approximately 7%—private loans lack the flexibility and protections of federal programs.

Private loans typically do not offer income-driven repayment plans, loan forgiveness programs, or the same forbearance and deferment options available with federal loans. This makes them similar to credit card debt in terms of limited flexibility for borrowers facing financial difficulties.

Public Service Loan Forgiveness Remains Secure

Despite concerns about potential elimination, Public Service Loan Forgiveness (PSLF) remains fully intact under the new legislation. This program, which forgives remaining loan balances after 120 qualifying payments for borrowers working in qualifying public service positions, will continue to operate unchanged.

Importantly, even borrowers who will be subject to the new RAP repayment plan after 2026 will still be eligible for PSLF. The 10% income-based payments under RAP qualify as eligible payments toward the 120-payment requirement, ensuring that future public service workers maintain access to loan forgiveness.

Qualifying Employment for PSLF

The program requires borrowers to work full-time for qualifying employers, which include government organizations at any level and tax-exempt non-profit organizations. Independent contractors, even those working for qualifying organizations, do not qualify for PSLF unless they can restructure their employment relationship.

One creative solution mentioned involves establishing a 501(c)(3) non-profit organization and becoming an employee of that entity, though this approach requires careful legal and tax planning.

Strategic Financial Planning for Families

The interview revealed several important strategic considerations for families navigating the changing student loan landscape.

Timing Considerations for Parent PLUS Loans

Families who have not yet borrowed Parent PLUS loans but have children who will be in college during the transition period should carefully consider their timing. Taking out Parent PLUS loans for the 2025-2026 academic year can lock in access to higher borrowing limits for three years, potentially saving tens of thousands of dollars in borrowing capacity.

Strategic Borrower Selection

When taking out Parent PLUS loans, families should carefully consider which parent serves as the borrower. While conventional wisdom suggests using the parent with lower income to minimize future payment obligations, other factors may be more important.

For example, if one parent is more likely to qualify for disability discharge or other forgiveness programs, it may be advantageous for that parent to be the borrower regardless of income level. This type of strategic planning requires careful analysis of each family’s specific circumstances.

Interest Rate and Capitalization Changes

The new legislation includes several technical changes designed to prevent loan balances from growing uncontrollably during repayment.

Reduced Interest Capitalization

Under previous rules, unpaid interest would be added to the principal loan balance (capitalized) whenever borrowers entered or exited forbearance or changed repayment plans. This capitalization caused loan balances to grow significantly over time.

The new rules eliminate most instances of interest capitalization, preventing the compound growth that has trapped many borrowers in cycles of increasing debt despite regular payments.

Interest Subsidies Under RAP

The RAP plan includes an interest subsidy mechanism that prevents loan balances from growing during repayment. While interest continues to accrue on the loans, the Department of Education pays the portion that exceeds the borrower’s monthly payment.

This subsidy serves two important purposes: it prevents the frustrating situation where borrowers see their balances increase despite making payments, and it eliminates the tax bomb that borrowers traditionally face when their loans are forgiven after 25 or 30 years of payments.

Increased Subsidized Loan Availability

The legislation increases the amount that undergraduate students can borrow in subsidized loans, which do not accrue interest while the student is enrolled in school. This change helps reduce the overall interest burden for students during their educational period.

Action Steps for Different Borrower Categories

Current Borrowers

If you currently have federal student loans, the new legislation should not cause immediate concern. Your existing repayment plans remain available, and you can continue with your current strategy. However, this is an excellent time to review your options and ensure you’re in the most advantageous repayment plan for your situation.

Consider consulting with a student loan specialist to evaluate whether you might benefit from the new bankruptcy discharge options if you’re experiencing severe financial hardship. The improved success rates make this a viable option for borrowers who previously assumed their loans were permanent.

Families with High School Students

Families with students who will enter college in fall 2025 or spring 2026 should strongly consider taking out Parent PLUS loans during this period to lock in the three-year grace period. This strategy provides access to higher borrowing limits through 2028, potentially saving significant money compared to the new $20,000 annual caps.

Begin researching private loan options now, as these will likely become necessary supplements to federal aid for expensive schools. Compare interest rates, repayment terms, and borrower protections across multiple lenders.

Future College Students (2026 and Beyond)

Students and families planning for college entry in 2026 or later should fundamentally reconsider their college financing strategy. The new borrowing limits may make expensive private colleges financially unfeasible without substantial private borrowing or family resources.

Consider prioritizing schools with lower total costs, maximizing merit aid opportunities, and exploring state schools with strong programs in your field of interest. The financial landscape will be significantly different, requiring more conservative borrowing approaches.

Public Service Workers

Current and prospective public service workers should feel confident about pursuing PSLF, as the program remains fully protected under the new legislation. If you’re considering a career change into public service, the combination of PSLF and the new RAP payment structure may make this an even more attractive option.

Looking Ahead: The Future of Higher Education Financing

The 2025 budget bill represents the most significant change to federal student loan programs in over a decade. While the immediate impact on current borrowers is minimal, the long-term implications for higher education financing are substantial.

Market Response Predictions

The restriction of federal borrowing will likely trigger several market responses. Private lenders are already positioning themselves to fill the gap left by reduced federal lending, potentially offering competitive products but without federal protections.

Colleges and universities face pressure to reduce costs, though whether this actually occurs remains to be seen. Institutions may instead focus on increasing merit aid or developing new financing partnerships to maintain accessibility.

Technology and Alternative Education

The borrowing restrictions may accelerate the adoption of alternative educational models, including online programs, competency-based education, and employer-sponsored training programs. These alternatives often cost significantly less than traditional four-year degrees while providing relevant skills for today’s job market.

Conclusion: Navigating the New Student Loan Landscape

The 2025 budget bill fundamentally reshapes federal student loan programs, creating a more restrictive but potentially more sustainable system for future borrowers. While current borrowers largely maintain their existing options, families planning for future college expenses must adapt to new realities.

The key to success in this new environment is early planning, strategic thinking, and professional guidance when needed. The changes create both challenges and opportunities, and borrowers who understand the new rules will be better positioned to make informed decisions about their educational investments.

The preservation of Public Service Loan Forgiveness and the introduction of interest subsidies in the RAP plan demonstrate that policymakers recognize the need to balance fiscal responsibility with borrower protection. However, the shift toward private lending for high-cost education raises important questions about accessibility and long-term affordability.

As these changes take effect over the next few years, continued monitoring and adaptation will be essential for borrowers, families, and educational institutions alike. The student loan landscape is evolving rapidly, and staying informed about these changes is crucial for making sound financial decisions about higher education.