America's Student Loan System Faces a Reckoning in 2026 as Trump-Era Overhaul Ends Biden's SAVE Plan

As 2026 approaches, the U.S. federal student loan system is undergoing a seismic shift. The popular SAVE plan-era 2026 repayment plan is being dismantled following legal challenges, making way for a sweeping overhaul spearheaded by the Trump administration and Congress. Starting July 2026, millions of borrowers will face new repayment rules and stricter borrowing limits, a change expected to create significant financial uncertainty.

The Fall of the SAVE Plan

In early Biden administration, the U.S. Department of Education announced a proposed settlement to end the SAVE plan. Hailed by advocates like Persis Yu of Protect Borrowers as the "most affordable, generous and flexible plan," it offered some low-income borrowers monthly payments as low as $0 and a faster track to loan forgiveness.

The plan's generosity, however, prompted Republican state attorneys general to sue the Biden administration for exceeding its authority. The resulting legal battle has now culminated in the plan's termination. "The law is clear: if you take out a loan, you must pay it back," said Under Secretary of Education Nicholas Kent. Now, the 7 million borrowers enrolled in SAVE must transition to other repayment plans, which will likely mean higher monthly payments. "People that made other financial decisions based on what they thought their payment was gonna be... they're in trouble," warned Betsy Mayotte of The Institute of Student Loan Advisors (TISLA).

A New Repayment Landscape and PSLF Hurdles

Beyond SAVE, other popular income-driven plans like PAYE and ICR are being phased out by mid-2028. Under the Trump, two new plans will become the primary options for new borrowers from July 2026:

The rules for PSLF are also tightening. The Trump administration has introduced a rule allowing the department to deny forgiveness to employees of public or nonprofit entities that engage in activities with a "substantial illegal purpose." Critics argue this vague language could be politicized to punish governments that defy federal policies, such as those on immigration.

New Caps on Graduate Borrowing and a Looming "Default Cliff"

The changes aren't just about repayment; they also affect how much students can borrow. The Grad PLUS program, which allowed graduate students to borrow up to the full cost of attendance, will be eliminated after July 2026. New annual borrowing limits will be capped at $20,500 for most graduate students and $50,000 for professional degrees. While supporters hope this will pressure schools to lower costs, critics fear it will push students toward the private loan market.

Amid these policy shifts, borrower distress is at a crisis level. An analysis by the American Enterprise Institute (AEI) shows that ICR people—more than one in four federal student loan borrowers—are delinquent or in default. This has led experts like Persis Yu to warn that America is at "the precipice of a default cliff."