Borrowing for College Is About to Become Even More Confusing

Congress enacted drastic changes to federal student loan and repayment programs with the “One Big Beautiful Bill Act” passed earlier this year. 

Graduate students face new limits on their borrowing, as do parents of college students. Medical students in particular could find it hard to finance their education, thanks to a new annual cap on borrowing of $50,000 a year. (The total cost of attendance for one year of medical schools runs as high as $113,746 at a private institution like Harvard, but it’s still $66,176 at state school like the University of Texas-Southwestern.) 

In addition, Congress overhauled student loan repayment plans to limit the number of options available and to lengthen the period before a loan is forgiven.  Moreover, students who qualify for loan forgiveness under income-driven repayment plans could face significant tax bills for this benefit, beginning in 2026. 

Given the decimation of the Department of Education earlier this year, the implementation of all these changes—and the processing of student loan applications this fall—could be challenging, says Sandy Baum, a senior fellow at the Urban Institute and one of the nation’s leading experts on student debt and college affordability. More concerning, she says, is the lack of a coherent rationale for all of these changes in the first place. “The most positive way of looking at it would be to say the changes to student loans are designed to eventually make the system simpler to ensure that more people repay their loans so that taxpayers are not on the hook,” she said. “On the other hand, it’s pretty clear that the overarching goal is not increased access to college.”

This transcript has been edited for length and clarity.

Anne Kim: The “One Big Beautiful Bill Act” contained a ton of provisions that affect student loans and college financial aid. If you had to break it down to the bottom line, who are the students most affected by the new law?

Sandy Baum: Well, the bill is so that it’s hard to get to all of the details. But the student aid changes that are most significant have to do with student loans. But it’s not undergraduate students whose borrowing capacity is affected. It is graduate students and parents of undergraduate students. 

Currently, graduate students can borrow almost an infinite amount from Grad Plus loans and cover all of their educational expenses. That’s gone, and there are now new limits on the total amount that graduate students can borrow. 

There are also new limits on how much parents can borrow to support their undergraduate students. It used to be that they could borrow up to the full cost of attendance to cover all of the expenses not covered by other financial aid, but now there will be limits. 

Anne Kim: For the graduate students, I’m assuming that professional students—like medical students, law students and business school students—are going to be in the most trouble. In fact, the president of the American Medical Association called the graduate student loan limits “a punch in the face.” How impactful is this going to be on the future supply of doctors, lawyers, MBAs, and professors?

Sandy Baum: First of all, professional students will be able to borrow more than master’s degree students and research doctoral students. But it’s not entirely clear which programs will be categorized as “professional.” 

So for example, one of the programs that would be very much affected if you don’t call it a “professional” program is the “PsyD”—psychology doctoral degrees. About half of those students would be very much affected by the limits. But if they are categorized as “professional” degree students, then loan limits would be significantly higher, and it might not be a problem.

You’re right to mention doctors because doctors and dentists are much more likely to hit the limit. A much larger share of people studying medicine and dentistry now borrow more than what the new limits will allow them. So it will not be surprising that medical schools will be making noise about this, and I could imagine that being something that could change and be adjusted in the near future.

Anne Kim: What about Parent PLUS loans?  Is it middle-class parents who take out Parent PLUS or is it lower income parents who are more likely to take out Parent PLUS? Whom are those limits going to affect?

Sandy Baum: Well, the Parent PLUS Loan was initially designed to make it easier for middle- and upper- income families to come up with the cash—people who could afford to pay but didn’t have the liquid assets and needed to pay over time. That makes sense. But increasingly, more and more middle- and low income families have been taking Parent PLUS Loans because they don’t have any other way to pay. 

A shocking share of people with zero ability to pay take out Parent PLUS loans. Many people who would never get a loan if they went to the bank get Parent PLUS loans and have no hope of repaying it. It’s not that low-income borrowers are more likely to borrow than higher income, but a disturbing share of Parent PLUS borrowers are low-income. However, it’s the higher-income parent borrowers who borrow large amounts. So it seems like the limits on Parent PLUS will mean that they are less useful to the more affluent families who are using this as a financing mechanism. 

But these limits won’t solve the problem of low-income families taking out Parent PLUS loans because very few really low-income parents are going to hit the limit.

Anne Kim: Right. So the new limits for Parent Plus are $65,000 in the aggregate per child and $20,000 a year. And looking at some of the tuitions that are out there now—where a few schools have hit $100,000 a year in costs—that $20,000 per year limits seems like a suddenly small amount to some parents, I’m sure.

Sandy Baum: That’s right, although for many of the low-income parents, they’re getting the financial aid that pays a big part of that. 

One of the interesting things about the loan limits is that if it’s $20,000 a year and $65,000 overall, you can borrow $20,000 a year for the first three years, but not the fourth year. It’s a little confusing. And master’s degree students, the annual limits don’t add up either. If you’re in a two-year master’s program or even a three-year master’s program, you’re not going to hit the aggregate $100,000 limit because it doesn’t take you that long to get a degree. So that’s very odd.

Anne Kim: It’s very odd. So from what you’re saying, the implication is that what the administration and the GOP are trying to do here is to limit the likelihood of default by certain borrowers. But is that actually going to be the effect? What unintended consequences do you see?

Sandy Baum: It’s not clear that there was a reasoned way of thinking about limiting default because affluent parents don’t default on Parent PLUS loans. It’s the low-income parents who should have been given a bigger Pell Grant instead of Parent PLUS loans who are likely to default and still going to be defaulting. Graduate students are increasingly having default problems, but medical students aren’t very likely to default. 

Anne Kim: So let’s talk about repayment plans, and this is a little bit confusing as well. It sounds like new borrowers are going to have basically only two options available to them, but it’s  unclear what’s going to happen to current borrowers. Can you explain what these two new options are going to be and how that’s going to affect students’ experiences?

Sandy Baum: Well, first, let me say that we now have a crazy number of options, and students have no idea how to pick what they’re going to do. So limiting the number of plans is not in and of itself a problem. 

There will be one fixed payment plan with a term of 10 years, but if you borrow a lot of money, you’ll be able to extend that for a longer period of time so you have lower monthly payments. And then there’ll be one income-driven plan–the Repayment Assistance or “RAP” plan. And it’s interesting because when you look at its provisions, it’s not simple to figure out who will be helped and who will be hurt. 

When the Biden administration tried to implement this new plan called SAVE, which the courts struck down, it was incredibly generous, and many more people would have ended up having their balances forgiven. So if you compare the new plan to that plan, it looks worse for almost everybody.

But that’s not how people have been repaying their loans because SAVE really never went into effect. So it makes much more sense to compare the new plan to the way that students have been repaying. And in some ways, it’s going to be harder for students, and in some ways, it’s going to be easier. 

So for students in income-driven plans, your monthly payment depends on your income, not how much you borrowed, and you keep paying until you’ve paid it all off or until your balances are forgiven. Under current plans, your balances are forgiven after 20 years if you have only undergraduate loans, or 25 years if you have graduate loans. Under the new plan, everybody will have to pay for 30 years so loan forgiveness is farther in the future. 

A lot of people also now have zero expected payment because their income is below 150 percent of the poverty line. But under the new plan, everybody pays at least $10 a month.

There are arguments for and against that. I mean, if you have no money, how are you going to come up with $10 a month? On the other hand, $10 a month is a pretty small amount. And some people think that this will help people get in the habit of paying their student loans. 

In some ways, the new plan is more generous. Right now, one big problem is that if your payments don’t cover your interest, your balances increase over time. And it’s really a problem that a lot of people see their balances balloon. 

But under the new plan, if your payment doesn’t cover your interest, that interest is forgiven. Now that’s going to be huge.

Take a recent medical school graduate who may have borrowed $300,000 and they’re in residency. Their payments can’t pay all of the interest on that loan, so their interest will be forgiven. And in fact, if you have a $50 payment, they’ll apply it first to your principal and then forgive your interest. So in that sense, that’s much more generous. 

Anne Kim: That’s interesting. And do we know at this point whether current borrowers are going to be allowed—or forced—to switch into one of these plans? 

Sandy Baum: The people who signed up for the SAVE program that never really happened are going to have to be in one of these plans. But people who are already borrowing can keep their plan for a couple of years and then they will have some other options. It’s very confusing. I would recommend checking in with the school, with the lender, with whoever’s collecting the payments, because eventually everybody is going to go into one of these two plans. But current borrowers have some respite.

Anne Kim: Okay. I want to turn a little bit to low-income students and in particular Pell grants. Now, they did manage to dodge a bullet with this new law because earlier versions of the legislation, if I remember right, included some pretty steep cuts to Pell Grants for low-income students, but because there was so much outcry from community colleges and from student advocates, the final law did not go forward with these cuts.

But there’s at least one very significant change to the Pell grant and that is the ability now to use Pell grants for short-term job training programs. This could mean that adult learners have access to Pell that they didn’t have before, but there are also lot of questions about the quality of these programs and whether there are sufficient safeguards. What’s your overall take on so-called “workforce Pell” and if it’s going to have the beneficial impact intended?

Sandy Baum: I have mixed reactions to “workforce Pell.” On one hand, currently, the program has to be 15 weeks long to be covered. There are a lot of programs that we currently cover with Pell that aren’t very good and that don’t do much for students. Lowering the length of the time period to eight weeks is almost certainly going to let in some programs that don’t serve students well, but it’s not clear that the current dividing line is solving that problem either. 

So the real question is the protections. To what extent are they eliminating programs that don’t have good outcomes? They claim to have some protections in place, but I think a lot of people think those protections are not going to be very effective. 

Now, it’s going to help some low-income students enroll in programs that really can help them get a job. Community colleges like it for that reason.

It’s really hard to know. It’s easy to say, “Wouldn’t it be great if everybody could just get a few weeks of training and get a good job?” But the problem is that a lot of people go get short-term training, and they can’t get a good job. Workforce Pell could add to this problem, but it doesn’t really create a new problem. It’s a problem that we just haven’t solved. 

There’s also a new accountability measure, but it excludes certificate programs, which are the programs that have the biggest problems. 

Anne Kim: So let’s turn to that and talk a little bit about the so-called “accountability earnings” test. As I understand it, an undergraduate program can lose access to federal loans if graduates earn less than someone with a high school diploma. And the idea here is to improve quality and guarantee a return on investment. So you’ve already mentioned one problem with that—which is the exclusion of certificate programs—but what other problems do you see?  Are students going to be able to tell which programs are worth it and which not? How are the data going to be deployed?

Sandy Baum: I don’t know about the data because we don’t have anybody in the Department of Education who’s overseeing data anymore. They fired all those people. The Department of Education has been so demolished that any of these things are going to be very difficult to implement—it’s hard to imagine how any of this will be carried out. 

But these earnings tests are not going to have a huge impact because you have choices in how to make comparisons between programs. It can be median earnings nationally for high school graduates or it could be in your state.  And you have to remember that some schools, particularly community colleges, don’t participate in the federal student loan program anyway. Those students get Pell grants, and that will still be the case. 

There will be a few programs affected, but this is not going to have a very big impact because it’s not a stringent enough requirement and because of the limitations in the programs.

Anne Kim: So if you had to take a step back and look at the overall impact of this new law for college students and affordability, what do you think is the underlying rationale or philosophy for all of these changes? What is the administration trying to do?

Sandy Baum: You know, it’s impossible to determine what the administration is trying to do. They’re trying to stir things up. The most positive way of looking at it would be to say that the changes to student loans are designed to make the system simpler, to ensure that more people repay their loans so that taxpayers are not on the hook for unpaid balances. That’s the best way you can look at it. And some of the changes do suggest that they’re trying to do that. 

On the other hand, it’s pretty clear that the overarching goal is not increased access to college. And all of these things have been put together very quickly, so there are going to be a lot of unforeseen consequences.

Anne Kim: If there’s one thing that you could have done to fix the student loan system that was not in this bill, what would it have been?

Sandy Baum: So two things. One is that we should adjust for inflation. When you put an earnings threshold, for example, in the new student loan repayment system, an income that’s between $10,000 and $20,000 today is going to look really different ten years from now. We don’t do enough adjusting for inflation, and we should do more of that. 

Second, many students default or are delinquent on their loans because they really can’t afford the payments. But for others, it’s because they don’t know how to make the payments, and it’s bureaucratically very difficult to get into an income-driven repayment plan. 

In other countries, you are automatically placed in an income-driven repayment plan so your payments are automatically an affordable share of your income. We could do that. Other countries just withhold from paychecks, and students don’t have to worry about how to make their payments. I know there are arguments against this, but to me, making the program simpler and easier for students to manage could be huge, and we haven’t done that.

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