Student Loan Repayment Update
Income-Based Repayment Programs Fading Into the Sunset
About 42 million Americans have outstanding student loans to repay with a combined total of $1.6 trillion. Nine million of those borrowers are in “default,” which is defined as being 360 days or more since the last payment was made. Defaulted borrowers will often consolidate loans in order to qualify for income-based repayment (IBR) programs that fit more neatly into their budgets. The alternative is to face aggressive enforcement actions such as wage garnishments and tax refund intercepts which were restricted during COVID-19 but are currently on the table with renewed vigor.
Over the past several years, the Department of Education offered a variety of IBRs with alphabet soup names such as ICR, PAYE and SAVE. These programs allow borrowers to stretch out their payments to 20 to 25 years depending upon the program and the borrower’s income. However, Congress as part of the One Big, Beautiful Bill Act has established July 1, 2026, as the sunset for these programs. After that date, no more applications can be taken for these programs. As of December 2025, 734,221 applications were pending. Any loans disbursed after this date will also no longer qualify for any of these programs. Since defaulted student loans do not qualify for an IBR, applications to consolidate loans to qualify for these programs must be filed by the end of March 2026 since it can take three months to disburse a loan consolidation. And even if you qualify for one of these programs, they are all slated to be phased out by 2028.
In their place will be two choices. The first is the traditional tiered payments over 10 years, although options for 15, 20 or 25 years may be available. The only income-based repayment plan offered will be the Repayment Assistance Plan. This plan will most likely require a payment of 10% of discretionary income over a 20-year period. Discretionary income will be defined as the difference between annual Adjusted Gross Income on the most recent federal income tax filed and 150% of the applicable poverty guideline for the borrower’s state and family size. One advantage over current income-based programs is that financial hardship need not be demonstrated. All the borrower needs to do is certify income each year, which can be done automatically, and pay the amount calculated accordingly. Thus, married couples will still need to file separately to avoid adding the other spouse’s income to available resources. However, if the amount due is not paid over the 20-year period, it is likely that any remaining balance thereby discharged will be considered taxable income.
The Department of Education is still finalizing the regulations for these changes, so some of these details may change. The bottom line, however, is that if you need flexibility in dealing with your student loan payments, your time is getting shorter to apply for the existing programs.
