Federal Student Loan Program Changes to Take Effect on July 1, Pending Litigation Outcomes or Legislative Action

At a Glance

• The Department of Education issued final regulations implementing federal student loan program changes from the "One Big Beautiful Bill Act," effective July 1, 2026.
• Key changes include: elimination of the Grad PLUS Program for new borrowers; new annual and aggregate loan limits; proration of loans for less-than-full-time enrollment; two new repayment plans (Tiered Standard and Repayment Assistance Plan); and sunsetting of legacy repayment plans.
• The regulations are currently subject to legal challenges, including lawsuits and proposed legislation.

On May 1, 2026, the US Department of Education (the Department) published its final rule (the Final Rule) amending regulations for federal student loan programs authorized under Title IV of the Higher Education Act of 1965 (HEA). These regulations implement the statutory changes enacted by Public Law 119-21, the Working Families Tax Cuts Act (often referred to as the "One Big Beautiful Bill Act"), signed into law on July 4, 2025. The regulations were developed through a negotiated rulemaking committee process that achieved consensus on the regulatory text, and following a 30-day public comment period during which the Department received 80,793 public comments.

The changes adopted by the Final Rule are effective July 1, 2026. Notably, the Department bypassed the HEA's master calendar provisions — which generally require that any changes to Title IV program regulations be published in final form by November 1 to take effect the following July — by asserting that Congress implicitly waived it by setting an explicit statutory effective date. As discussed in more detail below, the Final Rule is currently subject to both lawsuits and proposed legislative actions.

This client alert summarizes the major provisions of the Final Rule by topical area, with particular attention to the changes most likely to affect postsecondary institutions and their students.

Elimination of the Graduate PLUS Loan Program

One of the most significant changes is the termination of the Graduate PLUS (Grad PLUS) Loan Program for new borrowers. An interim exception preserves Grad PLUS access for currently enrolled students during their "expected time to credential," provided the student was enrolled in a program of study at an institution as of June 30, 2026, and a Direct Loan was made for that program prior to July 1, 2026. If the student withdraws or otherwise ceases to be enrolled in the program of study, the limitation on new Grad PLUS loans applies. Students who transfer to a different institution, even within the same field of study, are considered to have entered a new program and therefore lose eligibility for the interim exception.

The Department acknowledged in the preamble that the elimination of Grad PLUS may cause some programs to close or be eliminated if institutions do not reduce tuition or students are unable to access alternative funding, including institutional aid, scholarships, endowment funds, or external sources. The Department stated that Congress intended these changes to put downward pressure on tuition and reduce costs to decrease the debt burden on students, and that borrowers and taxpayers will benefit if "low-value programs are eliminated."

New Annual and Aggregate Loan Limits for Graduate and Professional Students

The Final Rule establishes new annual and aggregate limits for Direct Unsubsidized Loans for graduate and professional students, and for Parent PLUS Loans, effective for periods of enrollment beginning on or after July 1, 2026. Also, reflecting another significant change by Congress, the Final Rule implements a new distinction between "graduate" and "professional" students for purposes of the Title IV loan limits. These limits are as follows:

The graduate and professional aggregate limits are in addition to amounts borrowed for undergraduate education. The Parent PLUS aggregate limit of $65,000 is cumulative and applies without regard to any amounts repaid, forgiven, canceled, or otherwise discharged. Students enrolled in a program of study as of June 30, 2026, who received a Direct Loan for that program prior to July 1, 2026, are not subject to the new limits during their expected time to credential. Any loan funds returned by the institution or borrower do not count against the aggregate limit.

Definition of Professional Student

As evident above, the new distinction between "graduate student" and "professional student" is critical because professional students qualify for significantly higher annual and aggregate loan limits. Under the Final Rule, a professional student is defined as a student enrolled in a professional degree program, which is defined as a program: (1) that requires completion of academic requirements for beginning practice in a given profession, (2) is at a level of professional skill beyond a bachelor's degree, (3) is generally at the doctoral level, (4) requires at least six academic years of postsecondary education coursework (including at least two years of post-baccalaureate study), (5) generally requires professional licensure, and (6) includes a four-digit Classification of Instructional Programs (CIP) code in the same intermediate group as enumerated fields. The Department's illustrative list of professional degrees includes: Pharmacy (Pharm.D), Dentistry (D.D.S. or D.M.D.), Veterinary Medicine (D.V.M.), Chiropractic (D.C. or DCM), Law (L.L.B. or J.D.), Medicine (M.D.), Optometry (O.D.), Osteopathic Medicine (D.O.), Podiatry (D.P.M., D.P., or Pod.D.), Theology (M.Div. or M.H.L.), and Clinical Psychology (Psy.D. or Ph.D.)

The Department clarified that the list is illustrative and not exhaustive, but disagreed with commenters who suggested that graduate programs in certain other fields — including nursing, social work, architecture, engineering, business, and public policy — should be classified as "professional" programs. The Department emphasized that this classification does not reflect a "value judgment" by the Department and does not affect a profession's status outside the context of Title IV loan limits.

Lifetime Maximum Aggregate Loan Limit

A new lifetime maximum aggregate loan limit of $257,500 also takes effect on July 1, 2026, for the total amount of Title IV loans a student may borrow, excluding Parent PLUS loans. This lifetime limit is calculated without regard to any amounts repaid, forgiven, canceled, or otherwise discharged, although loan funds returned by the institution or borrower will not count against it. The same interim exception applicable to annual and aggregate limits also applies to the lifetime maximum. Congress did not provide authority for the Department to adjust the lifetime maximum for inflation.

Proration of Loans for Less Than Full-Time Enrollment

Beginning July 1, 2026, Direct Loan disbursements for students enrolled less than full-time must be reduced in direct proportion to the degree to which the student is not enrolled on a full-time basis. Under prior policy, students attending on at least a half-time basis received the same loan disbursement as full-time students. The reduction is calculated based on the student's enrollment status as of the date the institution determines the student's eligibility for the disbursement.

The Department acknowledged that institutions may need to make significant systems changes to implement revised disbursement requirements, including the ability to accommodate uneven disbursements between periods of enrollment. The Department will waive the "substantially equal disbursements" requirement when a borrower is subject to the less-than-full-time reduction. Nonterm programs are excluded from the proration requirement.

Institutional Limits on Student Borrowing

Beginning July 1, 2026, institutions may limit the total amount of Direct Subsidized, Unsubsidized, and PLUS Loans that a student (or a parent on the student's behalf) may borrow for a specific program of study for an academic year, provided any such limit is applied consistently to all students enrolled in that program. Institutions that exercise this authority must document their decision, provide clear and conspicuous information to current and prospective students about the limitation and its rationale, and notify affected students prior to taking action. The Department stated that this tool gives institutions the ability to set more appropriate loan caps tied to program cost and borrowing risk, consistent with the broader statutory objective of constraining "excessive borrowing."

Repayment Plan Restructuring

The Final Rule restructures the repayment plan framework for federal student loan borrowers, creating two new plans for loans made on or after July 1, 2026, and sunsetting several legacy plans.

For borrowers with loans made on or after July 1, 2026, repayment plan options are limited to the Tiered Standard repayment plan and the Repayment Assistance Plan (RAP), and borrowers may change between them after entering repayment. If a borrower with loans made on or after July 1, 2026, does not select a repayment plan, the Department will designate the Tiered Standard plan as the default.

Tiered Standard Repayment Plan

The Tiered Standard repayment plan is a fixed-payment plan under which a borrower must repay a loan in full by making fixed monthly payments (minimum $50 per month) over a repayment period that varies with the borrower's total outstanding Direct Loan balance:

Payments under the Tiered Standard plan do not qualify for Public Service Loan Forgiveness (PSLF).

Repayment Assistance Plan

The Repayment Assistance Plan is a new income-driven repayment (IDR) plan that bases monthly payments on a sliding scale of the borrower's adjusted gross income (AGI), ranging from 1% (for borrowers with AGI of $10,000 or less) to 10% (for borrowers earning more than $100,000). Monthly payments are further reduced by $50 for each dependent of the borrower. Key features of the RAP include:

No income protection allowance. Unlike prior IDR plans, the RAP calculates payments using the borrower's entire income, with no exempted amount.

Minimum payment of $10 per month. Borrowers earning less than $10,000 annually must pay at least $10 per month — prior IDR plans allowed $0 payments for borrowers below the income exemption level.

Interest subsidy. Unpaid interest is waived for borrowers making on-time payments that do not fully cover accruing interest, applicable to all loan types at any point in repayment.

Matching principal payment. For borrowers whose on-time monthly payment reduces their principal balance by less than $50, the Department provides an additional matching principal reduction so that the borrower's total principal paydown for that month reaches up to $50.

Loan forgiveness after 30 years. Borrowers receive forgiveness of the remaining balance after making 360 qualifying monthly payments over a period of at least 30 years. This compares to 20 or 25 years under prior IDR plans.

PSLF eligibility. Repayment under the RAP qualifies for PSLF if all other eligibility criteria are met. The Department has separately issued a final rule that substantially changed the scope of the PSLF program, which we covered previously in greater detail in a prior client alert. The PSLF final rule remains subject to ongoing legal challenges.

Sunsetting of Legacy Plans

The Final Rule phases out several legacy repayment plans, including the Income-Contingent Repayment (ICR) plan, Pay as You Earn (PAYE) plan, and Saving on a Valuable Education (SAVE) plan, for new borrowers on or after July 1, 2026. Payments under an ICR plan will count for PSLF only if made on or before June 30, 2028. Existing borrowers with loans made before July 1, 2026, generally retain access to the legacy plans for those loans, though a new Direct Loan may subject the borrower to new terms and conditions, including limited plan access.

Changes to Deferment and Forbearance

For Direct Loans made on or after July 1, 2027, the economic hardship and unemployment deferments are eliminated. Borrowers with loans made before July 1, 2027, retain these deferment options for those earlier loans. Additionally, under the Final Rule, discretionary forbearances are limited to a period that does not exceed nine months within any 24-month period. Under prior policy, borrowers could receive 12-month forbearances for up to three years.

Expanded Loan Rehabilitation

On or after July 1, 2027, a borrower may rehabilitate a defaulted loan a maximum of two times, up from only once. This provision applies to loans under the Federal Perkins Loan Program, the Federal Family Education Loan (FFEL) Program, and the Direct Loan Program. A defaulted Direct Loan is rehabilitated if the borrower makes nine voluntary, reasonable, and affordable monthly payments within 20 days of the due date during 10 consecutive months. Beginning July 1, 2027, the minimum rehabilitation payment increases from $5 to $10.

Public Service Loan Forgiveness Updates

The Final Rule adds the Repayment Assistance Plan as a qualifying repayment plan for PSLF. The Tiered Standard plan is not PSLF-qualifying. Payments under an ICR plan count for PSLF only if made on or before June 30, 2028. Time spent in deferment or forbearance while enrolled in the RAP does not count toward PSLF, because the statute specifies that only on-time payments under the RAP may be treated as qualifying PSLF payments.

Legal Challenges to the Final Rule

The Final Rule has been subject to significant legal challenges. For example, on May 19, 2026, a coalition of 25 state attorneys general and the District of Columbia filed suit against the Department in the District of Maryland (State of Maryland et al. v. United States Department of Education), challenging the Final Rule's definition of "professional degree" and its limitations on the grandfathering provision for current students. The plaintiff states allege the Department unlawfully added certain criteria, such as a requirement that graduates not be subject to "career-long supervision," to the definition of a "professional degree." They further contend that the Final Rule harms not only students, but also state institutions and state workforces, arguing that it will result in reduced funding for institutions and impede states' abilities to meet critical workforce needs.

On June 3, 2026, the American Academy of Physician Associates and PA Education Association also filed a lawsuit, arguing that the Final Rule exceeds the Department's authority and will reduce enrollment in healthcare and other graduate programs by cutting off access to higher federal loan limits. Other organizations, including nursing associations, have also filed suit to challenge the Final Rule. Institutions and borrowers should monitor litigation and possible legislative or regulatory revisions impacting implementation of the Final Rule.

Proposed Legislative Actions

Anticipating the Department may implement the professional degree definition as it ultimately did, Rep. Mike Lawler (R-NY) introduced the Professional Student Degree Act (H.R. 6718) in December 2025, which would legislatively expand that definition to include 13 additional graduate programs. On May 7, 2026, a group of Democratic members of Congress introduced a bicameral resolution under the Congressional Review Act to rescind the Final Rule in its entirety.

On June 9, 2026, the House Appropriations Committee approved its Fiscal Year 2027 Labor, Health and Human Services, Education, and Related Agencies appropriations bill with a bipartisan amendment that would reclassify graduate nursing programs as "professional" degrees for purposes of the federal student loan limits. If enacted, the amendment would legislatively designate nursing students as "professional students" for purposes of Title IV loan limits. Although the amendment has been reported out of the Appropriations Committee, it has not yet been considered by the full House or Senate. The Senate also has not yet released its Fiscal Year 2027 budget proposal for the Department; accordingly, the amendment does not alter the current regulatory framework. Institutions with nursing programs should nevertheless monitor the proposed amendment, as final enactment could materially expand the Title IV borrowing capacity of future nursing students.

Implications for Postsecondary Institutions and Students

The changes reflected by the Final Rule could have potentially significant operational and financial impacts on higher education institutions and students. The revised student loan limits are expected to decrease the available federal student loan amounts for many academic programs and students. That will require, among other things, alternative lending sources, reductions in tuition pricing, or the elimination of some programs. Institutions also will need to update systems, procedures, and communications to implement proration requirements for part-time students. The new authority for institutions to establish program-level borrowing limits below the statutory cap provides institutions a tool for managing student debt burdens but also creates new disclosure and consistency obligations.

For More Information

For further information, you may contact the authors. Faegre Drinker's education team will continue to monitor additional developments, relevant litigation updates, and further agency guidance in the coming weeks.

Legal clerk Caitlin Kwalwasser contributed to this update.