HEA Revisions and Other Provisions Affecting Postsecondary Institutions in the OBBBA

At a Glance

• The Act addresses the Pell Grant program shortfall, introduces Pell Grant eligibility (“Workforce Pell”) for short-term programs and imposes new limits on Pell eligibility for some students.
• The Act establishes new federal student loan borrowing limits for undergraduate, graduate and professional program students, and on parent borrowers through the Parent PLUS program. 
• The Act postpones the effective date of the 2022 Borrower Defense to Repayment (BDR) Final Rule, as well as the closed school discharge provisions that would have become effective on November 1, 2022.

On July 4, 2025, President Trump signed the “One Big Beautiful Bill Act” (OBBBA or the Act), enacting substantial changes to numerous areas of law affecting postsecondary institutions. This alert summarizes the Act’s key provisions and highlights certain areas of existing law that were debated in prior versions of the legislation but ultimately remain unchanged. We have also published a review of the OBBBA’s endowment tax provisions for certain colleges and universities.

Pell Grant Funding, Eligibility and Short-Term Program Participation 

To address an anticipated shortfall in Pell Grant funds, the Act mandates a $10.5 billion allocation to the Pell program as part of the upcoming (FY 2026) budget. For potentially Pell-eligible students whose parents’ adjusted gross income (AGI) includes foreign income, the OBBBA requires such income to be counted in all circumstances, removing a current conditional exemption. The Act removes Pell eligibility for two categories of otherwise-eligible students: (1) those whose student aid index (SAI) exceeds twice the maximum Pell award, and (2) those whose nonfederal grants or scholarships — including those from state, local, other municipal or private sources — cover the student’s entire cost of attendance (COA). 

The OBBBA also establishes for the first time that certain short-term programs aimed at workforce readiness and skilled trade credentials may participate in the Pell Grant program under certain conditions. Such “Workforce Pell” programs must be 8 to 15 weeks in length, encompassing at least 150 and no more than 600 clock-hours. Programs are only eligible if offered by accredited institutions, and may not be remedial, correspondence-based, English as a second language (ESL) nor study-abroad. The credential obtained through Workforce Pell must be “portable” and “stackable” under the OBBBA, such that it is recognized by more than one employer or admits students to entry-level employment in which only one postsecondary credential is recognized. It must be transferrable to a later degree program if the student so chooses. To participate, programs must be “in demand” as determined by the governor of the state and may not be in the first year of being offered by the institution. Finally, programs must meet outcomes benchmarks and value metrics to maintain eligibility for Workforce Pell participation. Specifically, both the completion rate and the placement rate (measured 180 days from completion) must be at least 70%, and the program may not cost more than the marginal average salary gains of students who completed it three years beforehand. 

Other Student Aid Eligibility and Student Need Analysis 

The Act revises a provision in existing law (through the FAFSA Simplification Act) that did not account for certain highly illiquid family assets in determining student eligibility and the corresponding SAI. Under the OBBBA, residential family farms and family-owned small businesses with under 100 full-time equivalents (FTEs) are excluded from the asset valuation on which the SAI is calculated. Family-owned commercial fishing businesses are similarly exempted. The Act does not revise overall student eligibility as currently defined in Title IV of the Higher Education Act (HEA) and its implementing regulations, as prior versions of the legislation had proposed (e.g., regarding the eligibility of certain noncitizen students for federal student aid). 

Federal Direct Loan Program Revisions and Terminations

The OBBBA imposes new annual, aggregate and lifetime loan limits for various Direct Loan programs (including Parent PLUS loans), and sunsets the Graduate PLUS loan program as of July 1, 2026. For Parent PLUS loans, the Act imposes an annual parental borrowing limit of $20,000 total for “all parents,” such that the limit is identical regardless of the number of parents claiming the student as a dependent (e.g. $20,000 for both parents if married filing jointly, or $10,000 each if married filing separately, or $20,000 for single parents). The Act also imposes a $65,000 aggregate Parent PLUS borrowing limit for each dependent student. 

For graduate and professional school loans, the OBBBA limits loans to graduate students at $20,500 annually, with a $100,000 aggregate maximum, and to professional students at $50,000 annually, with a $200,000 aggregate maximum. Amounts borrowed for undergraduate work are excluded from those caps, but the Act creates a $257,500 maximum lifetime borrowing ceiling on all federal student loans, except for any Parent PLUS amounts. While all the above-described statutory provisions are effective as of July 1, 2026, most current borrowers (including parent borrowers) may continue to operate under current loan limits for three academic years or for the remainder of the pertinent program, whichever is less. 

The Act permits institutions to set out program-specific loan limits, so long as those limits are applied on an equal basis across the entire program and not on an ad hoc basis for individual students. 

Student Loan Repayment Program Overhaul and Sunsetting of Current Plans 

For borrowers with federal student loans originating on or after July 1, 2026, the OBBBA creates a new structure for repayment plans, rehabilitation terms, deferment options, and loan forbearance duration and frequency. Such borrowers must choose whether to enroll in either (a) the Act’s new income-based repayment plan — the Repayment Assistance Plan (RAP), which will become the sole income-driven repayment option — or (b) the Act’s new standard repayment plan, which establishes 10, 15, 20 or 25-year fixed repayment terms based on the total amount borrowed. Borrowers making no proactive choice will be placed in the standard (fixed) repayment term program. If current borrowers also take out new loans made on or after July 1, 2026, they must choose either the RAP or the new standard plan, because the OBBBA further requires that all loans be repaid under the same plan, regardless of whether they are consolidated after July 1, 2026. 

New borrowers choosing the RAP will pay no more than 10% of their adjusted gross income monthly, under a 30-year repayment period. (Note that if the RAP’s income-percentage-based monthly payment is higher than the borrower’s payment would be under the standard repayment plan, no downward adjustment is made.) Existing borrowers with loans originating entirely before July 1, 2026, and currently in any one of the Income-Contingent Repayment (ICR), Pay As You Earn (PAYE) or Saving on a Valuable Education (SAVE) plans must transition to a new repayment plan within the next three years, before July 1, 2028. Those borrowers may choose any current standard repayment plan, the current Income-Based Repayment (IBR) plan, or the new RAP. If borrowers currently on ICR, PAYE or SAVE do not make an election, they will be placed in the RAP. Current borrowers in IBR repayment may remain in that program, under which any remaining loan balance will be cancelled after 25 payment years. The Act eliminates the U.S. secretary of education’s authority to establish new income-contingent repayment plans. 

Finally, the Act permits borrowers to rehabilitate their loans twice (rather than once, as is currently the case). It also removes the possibility of loan deferment for any loans made on or after July 1, 2027, and sunsets deferment entirely once all loans made before that date are repaid in full. However, the OBBBA does generally expand the availability of loan forbearance, which will be available for as many as nine months in any two-year period for all loans on or after July 1, 2027. 

Institutional Accountability 

The OBBBA establishes a new institutional accountability measure, on a per-program basis for all types of institutions, through its newly defined “low earning outcome programs” (LEOP). Effective as of July 1, 2026, any program that fails the measure in any two out of three years (including failure in nonconsecutive years), loses eligibility to participate in the Direct Loan program. Failure in any given year requires the institution to issue warnings to current and prospective students. To determine whether a program is a LEOP, the Act assesses undergraduate and graduate programs differently. An undergraduate program is a LEOP if the median earnings of its graduates, four years after graduation, do not exceed the median earnings of “working adults” with only a high school degree or GED who are not pursuing postsecondary education. For a graduate program, a LEOP is one whose graduates’ median earnings, four years after completion, do not exceed that of students with only a bachelor’s degree (who are not pursuing further graduate or professional education). Depending on the program’s mix of in-state and out-of-state students, the relevant earnings figures are to be based on census bureau income data at the state or national levels. Small programmatic cohorts are exempted, and no program may lose eligibility under this provision without an opportunity to appeal. 

Limited Regulatory Postponements 

As enacted, the OBBBA did not revise or repeal the “90/10 Rule,” the “Gainful Employment (GE) Rule,” or other regulatory frameworks which have undergone substantial revision in recent years. However, the Act did postpone the implementation of both the 2022 Borrower Defense Final Rule and the 2022 Closed School Discharge Rule until July 1, 2035. Regarding BDR, for which the 2022 rules are also enjoined, the rules revert to those which were effective as of July 1, 2020. For closed school discharges, the rules revert to those which were in effect on and before October 31, 2022. 

Net Investment Income Taxation 

Unlike the 2017 Tax Cuts and Jobs Act (TCJA), which imposed a 1.4% endowment tax on applicable universities with more than 500 students, the OBBBA imposes a set of graduated tax rates on the “net investment income” of all institutions that hold at least $500,000 in per-student endowment and have at least 3,000 students in any taxable year beginning after December 31, 2025. Religious institutions are not exempt if they otherwise meet the pertinent criteria, and the Act imposes an expanded definition of “investment income,” which now includes royalties garnered in connection with federally supported research, development, or other work by students or faculty members. We have published a separate alert on the net investment income taxation provisions.

Conclusion

Please note that this summary focuses primarily on the Act’s regulatory implications for postsecondary institutions and their current and prospective students. Our education team has published a review of the OBBBA’s endowment tax provisions, and Faegre Drinker is publishing comprehensive subject-matter analyses of the OBBBA. 

For More Information

We continue to review and monitor the effects and implementation of this significant legislation. Please do not hesitate to contact the authors if you have any questions regarding any of the matters discussed above.