Provisions Affecting Higher Education in the Reconciliation Law

[ad_1]

On July 4, 2025, President Trump signed into law a budget reconciliation bill that makes radical changes to numerous federal safety net programs, tax policy, and higher education policy. The law overhauls the federal student aid system, rolls back accountability measures meant to protect students from fraud, and makes deep cuts to the Supplemental Nutrition Assistance Program (SNAP) and Medicaid. The consequences for students, borrowers, and institutions will be dire, impacting college access and affordability for generations to come.

Students, especially those from low-income backgrounds, will have fewer options to finance their education, in addition to potentially losing access to essential social safety net programs. Meanwhile, student loan borrowers will have fewer repayment plan options and steeper monthly payments. The rollback of accountability measures will make it significantly more difficult for those defrauded by their institutions to access relief, leaving them with limited protection against predatory practices.

Below, we summarize the law’s higher education-related provisions.

Jump to Section:

New Limits on Loan Access for Graduate Students & Parents of Undergraduate Students

Effective July 1, 2026, the law eliminates the Graduate PLUS loan program. Graduate student borrowing will be capped at $20,500 per year, with a lifetime borrowing limit of $100,000. Professional student borrowing will be capped at $50,000 per year, with a $200,000 lifetime borrowing limit. The current Graduate PLUS program allows graduate and professional students to borrow up to the full cost of attendance each year. We don’t know yet exactly which programs will end up being considered “graduate” versus “professional” for the purpose of these new limits.
Effective July 1, 2026, the law imposes limits on the Parent PLUS program of $20,000 per year for each dependent student, with a lifetime limit of $65,000 per student. The current program allows parents of dependent undergraduates to borrow up to the full cost of attendance each year.
Effective July 1, 2026, the law establishes a new aggregate lifetime loan limit of $257,500 for all borrowers, regardless of any amounts repaid or forgiven, but excludes Parent PLUS loans from that aggregate maximum.
Existing borrowers enrolled in a program by June 30, 2026, are exempt from new borrowing caps for three years.
The law permits institutions to set lower annual loan limits for students and parents, provided the policy is applied consistently to all students within the same program of study.
The law makes no changes to undergraduate borrowing limits or the subsidized student loan program.

Overhaul of the Federal Student Loan Repayment System

Changes to Repayment Plans for Federal Student Loan Borrowers

For borrowers with loans disbursed after July 1, 2026 (“new borrowers”):

The law terminates all repayment plans authorized under the income-contingent repayment (ICR) statute, including the Income-Contingent Repayment, PAYE, REPAYE, and SAVE plans.
The law replaces all existing repayment plans with two new plans: a new “standard” plan and a new income-based plan, the “Repayment Assistance Plan” (RAP). Parent PLUS loans disbursed after July 1, 2026 can only be repaid in the standard plan.

For borrowers with only loans disbursed prior to July 1, 2026 (“current borrowers”):

As of July 1, 2028, the law requires all borrowers enrolled in an ICR-based plan (ICR, PAYE, REPAYE, or SAVE) to move out of that plan and into either:
A non-income-based plan (standard, graduated, or extended), or
One of two income-based plan options: the new Repayment Assistance Plan (RAP) or a modified version of the two existing Income-Based Repayment (IBR) plans.
There are two different IBR plans; a borrower’s eligibility is based on when their loans were disbursed. Prior to this law, IBR plans required a borrower to demonstrate a “partial financial hardship,” but the law eliminates that requirement.
Borrowers with Parent PLUS loans must consolidate their loans and enroll in either “IBR 1” or “IBR 2” before July 1, 2026. Parent PLUS loans are not eligible for RAP.

Design Details: IBR Plans

Design Detail	IBR 2/Revised IBR	IBR 1/Original IBR
Eligibility (Based on Borrowing Date)	Borrowers who took out their first loan on or after July 1, 2014	Borrowers who took out their first loan before July 1, 2014
Monthly Payment Formula	$0 payments for income/family size up to 150% of the federal poverty level (FPL) and10% of all income above 150% FPL, up to the fixed 10-year payment amount	$0 payments for income/family size up to 150% FPL and 15% of income above 150% FPL, up to the fixed 10-year payment amount
Maximum Repayment Term	20 years	25 years
Treatment of Interest Accrual While Enrolled in IDR	Same as IBR 1	Subsidized loans: Unpaid accrued interest is 100% covered for up to 3 years Unsubsidized loans: No interest subsidy
Treatment of Married Borrowers	Same as IBR 1	Allows borrowers whose tax status is married filing separately to exclude their spouse from both the borrower’s household income and family size

Details of New Repayment Plan Options for Federal Student Loan Borrowers

New Standard Repayment Plan

For new borrowers, the new “standard” plan collapses the existing standard, graduated, and extended plans into one plan with fixed monthly payments and different repayment terms based on the borrower’s total outstanding principal at the time they enter repayment. The higher the balance, the longer the repayment term. Borrowers are allowed to pay down their loans more quickly without pre-payment penalties.

Repayment Terms: New Standard Repayment Plan

Balance	Repayment Term
Up to $25k	10 years
$25-50k	15 years
$50-100k	20 years
$100k+	25 years

New Income-Based Repayment Plan (“Repayment Assistance Plan”)

Monthly Payment Formula

RAP bases a borrower’s monthly payment on their adjusted gross income (AGI) and family size, and lowers a borrower’s payment by $50 per month per dependent child. Borrowers are required to make a minimum monthly payment of $10.
As such, the dependent child credit does not apply equally to all borrowers, as those with lower incomes (and resulting lower payments) will not receive the full $50 reduction. For example, a borrower with one child whose base monthly payment is $50 only receives a $40 monthly deduction, as their monthly payment cannot be less than $10.
For most borrowers, their monthly payment will increase under RAP, as compared to the SAVE plan.

Monthly Payment Determination: Repayment Assistance Plan

AGI	RAP Annual Payment (Divide by 12 for Monthly Payment)
Up to $10,000	$120
$10,001-$20,000	1% of AGI, minus $50/month per dependent child
$20,001-$30,000	2% of AGI, minus $50/month per dependent child
$30,001-$40,000	3% of AGI, minus $50/month per dependent child
$40,001-$50,000	4% of AGI, minus $50/month per dependent child
$50,001-$60,000	5% of AGI, minus $50/month per dependent child
$60,001-$70,000	6% of AGI, minus $50/month per dependent child
$70,001-$80,000	7% of AGI, minus $50/month per dependent child
$80,001-$90,000	8% of AGI, minus $50/month per dependent child
$90,001-$100,000	9% of AGI, minus $50/month per dependent child
$100,001+	10% of AGI, minus $50/month per dependent child

Maximum Repayment Term

Under RAP, any loan balance that remains after 30 years of on-time monthly payments is discharged, an increase from all prior plans, whose maximum term ranged from 10-25 years.

Treatment of Accrued Interest

Under RAP, if a borrower’s monthly payment is not enough to cover their accruing interest, the federal government subsidizes that unpaid accrued interest so the balance is always decreasing, rather than ballooning. This provision is intended to address the problem of negative amortization, in which a borrower’s income-based payment is too low to cover the interest accruing on their loan, thereby making their balance grow even as they make consistent monthly payments.

Principal Subsidy

RAP also includes a “principal subsidy” to ensure a borrower’s principal balance decreases each month, even if their payment is too low to reduce their principal. In other words, if a borrower’s monthly payment does not reduce their principal balance by at least $50 per month, the federal government will kick in enough to ensure their principal decreases by at least $50. (Note: While this provision is often referred to as a “principal match,” the word “match” is misleading, as the amount the government subsidizes is the difference between a borrower’s contribution and the $50 threshold, rather than a true 1:1 “match” of what a borrower pays.)

IDR Income Re-Certification Provisions

If a borrower opts out of having their data shared with the IRS to automatically re-certify their income and family size information and does not manually submit their data, their payment will revert to what it would be under a 10-year standard plan.
The law retains the current option of “alternative documentation of income” for borrowers whose most recently recorded AGI is not representative of their current financial circumstances.

Additional Repayment-Related Provisions

Effective July 1, 2027, the law allows borrowers to rehabilitate their loans out of default twice, with a minimum monthly payment of $10; until now, borrowers could only rehabilitate once.
Effective July 1, 2027, the law eliminates the unemployment and economic hardship deferments.
Effective July 1, 2027, the law limits a borrower’s time in forbearance to 9 months within any 24-month period.
The law prohibits the Education Department from issuing or modifying regulations with respect to pre-existing plans.

Changes to the Pell Grant Program

Eligibility Changes

The final bill did not include the major Pell cuts originally proposed by the House. Instead, it makes the following smaller changes to the program:

Effective July 1, 2026, the law makes a student ineligible for a Pell Grant if their Student Aid Index (SAI) equals or exceeds twice the amount of the maximum Pell award. (The SAI is an index number based on the data a student submits in their FAFSA that colleges and universities use to determine a student’s financial situation and their financial aid eligibility.) This will likely affect only a small number of students and is intended to target those whose AGI is low compared to their non-income assets, which results in a higher SAI than their AGI alone would show.
Effective July 1, 2026, the law includes foreign income in the calculation of a student’s Pell eligibility.
Effective July 1, 2026, the law makes a student ineligible for a Pell award if they are receiving other non-Title IV grant aid (e.g., aid from non-federal sources, including states, colleges, or private scholarship providers) that, taken together, equals or exceeds the student’s full cost of attendance (tuition, fees, and all other related expenses). This strange provision, which will deny otherwise-eligible students the benefit to which they’re entitled based on their SAI, is likely to mostly affect student athletes who receive full-ride scholarships.
Effective July 1, 2026, the law exempts assets from family farms, small businesses, and family-owned commercial fisheries from the SAI calculation. This is a re-instatement of an exemption for family farms and small businesses that existed prior to the passage of the FAFSA Simplification Act; fisheries are included for the first time.

Money to Address Looming Pell Funding Shortfall

The law adds $10.5 billion in mandatory funding for the Pell Grant program for FY2026 to avert a looming funding shortfall. (Note: While this funding is welcome, the program is likely to face shortfall again soon if lawmakers do not make additional investments.)

Expansion of Pell Eligibility to Very-Short-Term Programs

The bill expands Pell Grant eligibility to very-short-term job training programs. Until now, Pell Grants could only be used at programs that provide at least 600 clock hours/15 weeks of instruction. Effective July 1, 2026, students enrolled in programs between 150-599 clock hours/8-15 weeks will be eligible for Pell Grants.
Providers must be accredited and authorized to receive Title IV funds (as in the existing Pell Grant program). However, the law includes no data reporting requirements, which could impede state and federal efforts to regulate program eligibility and outcomes.
The law also allows students who have already obtained a bachelor’s degree to use funds for these very-short-term programs. Students with bachelor’s degrees cannot use Pell funds for other types of programs.
Providers are required to meet certain eligibility requirements, some of which are to be determined by state officials and others of which are to be determined by the U.S. Department of Education.
States are to determine whether a program:
- Prepares students for high-skill, high-wage, or in-demand industry sectors or occupations;
- Meets the hiring requirements of employers;
- Leads to a recognized postsecondary credential that is stackable and portable, unless the program prepares a student for employment in an occupation where there is only one recognized postsecondary credential; and
- Provides credit that articulates to one or more additional certificates or degree programs.
The U.S. Department of Education is to determine whether the program:
- Has been offered by the institution for at least one year prior to receiving eligibility;
- Has a verified completion rate of at least 70%, within 150% of normal time for completion;
- Has a verified job placement rate of 70%, measured at 180 days of program completion; and
- Has median value-added earnings that exceed the median total price charged to students.
  - Median value-added earnings are calculated by taking the annual earnings (adjusted for state, regional, and local areas) of a student who received aid and completed their program three years prior and subtracting 150% of the federal poverty level.

New Institutional Accountability Measures

Effective July 1, 2026, the law creates a new accountability measure for all Title IV-eligible programs requiring that most students earn more than they would have had they not attended the program; otherwise, the program will risk losing loan eligibility.
For undergraduate degree programs, the median completer who is working and not currently enrolled in further education would have to—for two out of three consecutive years—have earnings that exceed the median earnings of 25–34-year-olds in the state who only have a high school diploma or recognized equivalent.
For graduate programs (e.g., M.A., J.D., Ph.D., M.D., etc.), the same calculation will compare the median program completer to the median bachelor’s degree holder in the state, aged 25–34, working, and not currently enrolled in further education.

Delayed Implementation of Student Protections

The law delays the implementation of the Biden Administration’s Borrower Defense and Closed School Discharge rules for ten years. As a result, the Biden Administration’s rules will not be in effect “for loans that first originate before July 1, 2035.” In the meantime, the rules revert back to the Trump Administration rules that made it nearly impossible for defrauded borrowers to receive relief.

Cuts to the SNAP and Medicaid Programs

SNAP Cuts

The law shifts a portion of SNAP costs to states if they have a payment error rate above 6%. States with higher error rates would contribute more toward SNAP benefits, though their share would be capped at no more than 15%. Cost-sharing would begin in fiscal year (FY) 2028 with some flexibility in how error rates are determined at the beginning of the implementation period.
States whose FY 2025 and/or FY 2026 payment error rate is 20% or higher will have until FY 2029 or FY 2030, respectively, to delay the cost-share, which would kick in during FY 2028 for all other states.

SNAP Payment Error Rate	State Share
Error rate below 6%	No benefit cost share requirement
6%-8% error rate	State required to pay 5% of SNAP benefits
8%-10% error rate	State required to pay 10% of SNAP benefits
10% or higher error rate	State required to pay 15% of SNAP benefits

Medicaid Cuts

The law creates “community engagement requirements” for the Medicaid program, requiring that able-bodied adults, ages 19 to 64, participate in community engagement activities for at least 80 hours a month as a condition of eligibility, effective January 1, 2028. Parents and caretakers of someone with a disability or a child 14 or younger would be exempt. These requirements are likely to put millions at risk of losing their Medicaid coverage.
Qualifying community engagement activities include work, participation in a work program, participation in community service, enrollment in an education program, or to have a monthly income that is not less than the applicable minimum wage requirement under Section 6 of the Fair Labor Standards Act of 1938, multiplied by 80 hours.

Higher Education Tax Provisions

The law expands 529 savings account plans to cover expenses for Postsecondary Credentialing Programs, homeschooling, educational therapies, and other K-12-related costs.
The law permanently extends Section 127 of the Internal Revenue Code, allowing employers to provide up to $5,250 annually in tax-free educational assistance. Beginning in 2026, this amount will be indexed to inflation.
The law extends the current tax exemption on student debt discharged due to the death or total and permanent disability of the borrower.
The law increases the endowment excise tax on private colleges and universities by the following amounts:

Student-Adjusted Endowment	Excise Tax
$500K to $750K	1.40%
$750K to $2M	4%
More than $2M	8%

TICAS will publish additional analyses of the bill’s provisions over the coming weeks.

[ad_2]