Key Takeaways
- The One Big Beautiful Bill Act ended Grad PLUS for new borrowers and capped federal graduate and Parent PLUS lending from 1 July 2026.
- A single income-driven plan, the Repayment Assistance Plan, launched in July 2026, and borrowers on the SAVE plan are being moved off it.
- Collections on defaulted federal loans restarted in May 2025, but wage garnishment and tax refund offsets have been paused since January 2026, with no restart date announced.
- The Treasury has taken over operational collection of defaulted federal loans; the Department of Education still exists and still owns the loans.
- For private credit, the main effect is more demand for private student loans, a larger role for private lenders and more borrowers under strain, which raises both opportunity and the need for careful underwriting.
When Donald Trump returned to the White House in January 2025, the student loan market braced for change. The expectation was a hard turn from forgiveness to enforcement: collections restarted, the Department of Education wound down, perhaps even federal loans sold to private buyers.
Some of that has happened, some has been delayed, and some has taken a different form. Congress rewrote federal student lending in July 2025. Collections restarted and then paused. The Treasury has stepped into the Department of Education's role on defaulted loans. The biggest change for investors is the least dramatic: from July 2026, the federal government lends less to graduate students and parents, and the private market is expected to fill part of the gap.
This analysis sets out where US student loan policy stands in October 2026 and what it means for private student lending and for investors in it.
Federal student loan policy since 2025: a timeline
Policy has moved through legislation, executive action and the courts, often in parallel.
The key steps were:
- March 2025: the President signed an executive order to begin winding down the Department of Education, and suggested moving the loan portfolio elsewhere.
- May 2025: the Department resumed collections on defaulted federal loans for the first time since March 2020, starting with Treasury offsets.
- July 2025: the One Big Beautiful Bill Act became law, rewriting borrowing limits and repayment plans from July 2026.
- November and December 2025: the Department signed agreements moving several offices to other agencies, and announced a settlement with Missouri to end the SAVE plan.
- January 2026: the Department delayed wage garnishment and Treasury offsets while new repayment options were introduced.
- March 2026: the Department and the Treasury signed the Federal Student Assistance Partnership, moving operational work on defaulted loans to the Treasury.
- July 2026: Grad PLUS closed to new borrowers, new loan limits took effect and the Repayment Assistance Plan launched.
The end of Grad PLUS and new federal loan limits
From 1 July 2026, the One Big Beautiful Bill Act changed what students and parents can borrow from the federal government. Harvard's financial aid office gives a clear summary of the new limits.
| Loan type | Before July 2026 | From 1 July 2026 (new borrowers) |
|---|---|---|
| Grad PLUS | Up to full cost of attendance | Closed to new borrowers |
| Graduate loans | $20,500 a year unsubsidised, plus Grad PLUS | $20,500 a year, $100,000 aggregate |
| Professional degrees | $20,500 a year (more in some health fields), plus Grad PLUS | $50,000 a year, $200,000 aggregate |
| Parent PLUS | Up to full cost of attendance | $20,000 a year, $65,000 per student |
| Lifetime limit | None beyond programme limits | $257,500 across all federal loans, excluding Parent PLUS |
Existing borrowers in the same programme keep their current access for up to three years. Which programmes count as "professional" is contested: in June 2026 a federal court stayed the Department's narrow definition, widening eligibility for the higher limit while the case continues.
The American Enterprise Institute estimates that about $8bn a year of graduate borrowing, by roughly 370,000 borrowers, would exceed the new caps. KBRA puts the wider graduate funding gap at around $10–12bn a year.
Repayment: RAP replaces SAVE
The same law replaced most income-driven plans for new loans with the Repayment Assistance Plan, or RAP, and a tiered standard plan. Under RAP, borrowers pay between 1% and 10% of adjusted gross income, with a minimum of $10 a month and a $50 reduction for each dependant. Unpaid interest is waived, and any remaining balance is forgiven after 30 years. Loans made from 1 July 2026 can only use RAP or the standard plan. For loans made from July 2027, the law also removes economic hardship and unemployment deferments and limits forbearance to nine months in any two years.
The Biden-era SAVE plan, blocked by the courts since 2024, is closing. Under the Missouri settlement, the Department said it would move more than 7.5 million SAVE borrowers to other plans. Servicers began issuing notices from 1 July 2026, giving each borrower 90 days to choose a plan, after which they are placed on a standard plan. For many, monthly payments will rise.
Collections on defaulted federal student loans: restarted, then paused
The early-2025 expectation of hard enforcement was half right. Collections resumed in May 2025 after a five-year pause. In January 2026 the Department delayed wage garnishment and Treasury offsets, giving defaulted borrowers time to consider RAP and a second chance at loan rehabilitation. As of early October 2026, no restart date had been announced.
The pool of defaulted borrowers is large. The March 2026 Treasury agreement covered about 7.8 million borrowers in default owing around $179bn, according to a summary of the agreement. By the end of September, CNBC reported new data showing 9.3 million borrowers in default, as the Treasury and the Department launched a Defaulted Loans Support Center to move borrowers into rehabilitation and consolidation.
Who runs federal student loans now?
The Department of Education still exists, because only Congress can abolish it, and it still owns the federal loan portfolio. Operational responsibility is moving. Under the March 2026 partnership, the Treasury handles collection of defaulted loans, with later phases, not yet scheduled, covering non-defaulted loans and aid eligibility. Treasury referrals are for collection only and do not transfer ownership.
A sale of federal loans to private buyers remains possible but undecided. In February 2026 the Under Secretary of Education told Congress the Department had held discussions with stakeholders but had taken no final decision on selling all or part of the portfolio.
What was expected in 2025, and what has happened
The original version of this article, written in early 2025, set out the market's expectations. It is worth checking them against events.
| Early-2025 expectation | Position in October 2026 |
|---|---|
| Aggressive federal collections | Restarted May 2025; garnishment and offsets paused since January 2026 |
| Collections moved to the Treasury | Happened for defaulted loans, under a March 2026 agreement |
| Federal loans sold to private buyers | Discussed; no decision taken |
| Private loan defaults rise as federal loans take priority | Private charge-offs higher but no sharp spike; test delayed by the federal pause |
| Lenders offload private loan books | Distressed portfolios continue to trade; Discover sold its whole $10.1bn book to Carlyle and KKR |
The thesis that federal enforcement would push private loans down borrowers' priority lists, set out by Alt Lending's chief executive in our 2025 market update, has not yet been fully tested, because the pause has kept garnishment off the table. Private loan performance has softened gradually: Enterval reports annualised gross charge-offs of 2.71% in the third quarter of 2025, against a 2017–2019 average of 2.04%.
What this means for private student loans and investors
Three effects matter for private credit.
More private lending. With Grad PLUS closed, graduate students and parents who need more than the federal caps will turn to private lenders. Growth will be partial, because private lenders underwrite on credit, but it will need funding through securitisation, forward-flow sales and lender finance. Our guide to private student loans as an asset class covers the routes, and our SLABS guide explains the securitisation market.
More borrowers under strain. Higher payments for former SAVE borrowers, fewer deferment options for new loans and the eventual return of federal garnishment will stretch household budgets. Some of that pressure will reach private loans. When we visited Alt Lending in May 2026, our on-site review noted that the policy change had lifted demand for private alternatives at once, while also removing a mechanism that used to absorb borrower stress.
A larger distressed market. More strain means more charge-offs and more non-performing loans for specialist buyers. That is an opportunity for disciplined recovery strategies and a reason for closer diligence on servicing and documentation. Our guide to investing in distressed private student loans explains how these strategies work.
For allocators, the useful stance is to treat policy as a slow-moving driver of supply and credit quality. The things to watch over the next year are the restart date for involuntary federal collections, the outcome of the professional degree litigation, the pace of the SAVE transition, any decision on selling federal loans and the underwriting standards of lenders growing into the graduate gap.
Frequently Asked Questions
What did the One Big Beautiful Bill Act change for student loans?
It ended Grad PLUS for new borrowers, capped graduate, professional and Parent PLUS loans, set a $257,500 lifetime limit and replaced most income-driven plans for new loans with the Repayment Assistance Plan, from 1 July 2026.
Is federal student loan wage garnishment happening in 2026?
Not as of early October 2026. The Department of Education delayed wage garnishment and Treasury offsets in January 2026 and had not announced a restart date.
Has the Department of Education been abolished?
No. Only Congress can abolish it. Several functions have moved to other agencies, and the Treasury now handles collection of defaulted federal loans, but the Department still owns the loans.
What is replacing the SAVE plan?
SAVE borrowers are being moved to other plans, including the new Repayment Assistance Plan, under a settlement with Missouri. Borrowers who do not choose a plan within 90 days of notice are placed on a standard plan.
Will the government sell federal student loans to private investors?
It has been discussed, but the Department said in February 2026 that no final decision had been taken.
How do federal changes affect private student loans?
Lower federal limits push more graduate and parent borrowing to private lenders, while higher federal payments and the eventual return of collections may strain borrowers who hold both federal and private loans.
