Trump Administration's Impact on Student Loans: A Looming Crisis

The Trump administration's policies regarding student loans have sparked a significant crisis, leading to unprecedented levels of delinquency and default among borrowers. These actions have had far-reaching consequences, affecting not only borrowers but also their families and communities.

Spike in Delinquency and Default Rates

During the first year of the Trump administration, student loan delinquency and default rates surged to unprecedented levels. The student loan delinquency rate rose from near zero to approximately 25 percent of borrowers. This is nearly three times the delinquency rate before the pandemic (9.2 percent as of 2019). Almost 9 million student loan borrowers, or one out of every five, are in default, putting them at risk of wage garnishment and tax refund offsets.

Credit Score Decline and Economic Ramifications

Borrowers with delinquent student loans experienced an average credit score decrease of 57 points over the first three quarters of 2025, pushing three-quarters of them into "deep subprime" territory. This negative impact on credit scores will make it more difficult for these 2 million borrowers to access credit, potentially costing them thousands of dollars more on auto and personal loans. Securing housing and employment will also become more challenging.

Roughly half of borrowers (51 percent) who had a delinquency in 2025 had deep subprime credit scores the prior year; now, 76 percent of all borrowers with delinquencies have deep subprime credit scores. The 2 million student loan borrowers who had a credit score that was near-prime or better in 2024, and whose loans became delinquent in 2025, saw their credit score decrease by 100 points on average, from 680 to 580, plunging them to the edge of deep subprime.

Factors Contributing to the Crisis

Several factors have contributed to the rise in delinquencies.

Read also: Impact of Trump on Student Debt

Trump Administration Policies: The Trump administration's actions aimed at increasing student loan payments have played a significant role. Unlike the Biden administration's approach of implementing an "on-ramp" period to ease the transition back to repayment after the pandemic-era pause, the Trump administration has added roadblocks and restricted access to programs designed to help borrowers avoid falling behind.
Economic Strain on Families: Despite corporations experiencing high profits, many families are facing stretched budgets, making it harder to afford monthly student loan payments.
Department of Education Actions: The Department of Education blocked many borrowers from enrolling in income-driven repayment (IDR) plans for almost all of last year, and continued to fail to approve applications even after that period.
Staffing Cuts at the Department of Education: The Trump administration significantly reduced staffing levels at the Department of Education, including the Office of Federal Student Aid, which oversees student loan servicing.
Weakening of Consumer Protection: By weakening the Consumer Financial Protection Bureau (CFPB), the administration reduced oversight of student loan servicers and their obligations to borrowers.

Disproportionate Impact on Vulnerable Groups

Delinquency rates are particularly high for Black and Native American borrowers, reaching nearly 50 percent for these groups. Those from lower-income backgrounds are also disproportionately affected. By sinking credit scores, student loan delinquencies have major ramifications for borrowers’ ability to participate fully in the economy.

The Threat of Default and Garnishment

A borrower with a delinquent student loan must make all delinquent payments to get back on track, or they will default. Defaulted loans are subject to forced collections, including wage garnishment and offsets of Social Security benefits and tax refunds. Resuming garnishments during a time of economic hardship would be both cruel and economically reckless.

The SAVE Plan and Legal Challenges

In 2024, Republican attorneys general sued to stop the enactment of President Biden’s Saving on a Valuable Education (SAVE) Plan, an income-driven repayment plan that was designed to be more affordable and borrower-friendly. The Republican budget reconciliation law, signed into law by President Trump in July, repealed the SAVE Plan to pay for tax cuts that primarily benefit the ultra-wealthy. Many borrowers will become delinquent in the coming months and default in late 2026 or early 2027.

If the 6.7 million borrowers leaving the SAVE forbearance fall delinquent at the same 25 percent rate as the general population, 1.7 million more borrowers will fall delinquent. This brings the national total of borrowers in distress to nearly 17 million.

The One Big Beautiful Bill Act (OBBBA)

The One Big Beautiful Bill Act (OBBBA), passed in the summer of 2025, made significant changes to higher education financing, which are set to take effect in 2026.

Read also: The Impact on Education

Borrowing Caps

The act imposes limits on parent loans and most graduate loans, with higher limits for professional degree programs. These limits will affect roughly 25-40% of graduate borrowers, reducing federal loan volume by $8-10 billion annually once fully phased in, and reducing total government outlays by $44 billion over 10 years. Parent PLUS loans will be capped at $20,000 per year and $65,000 lifetime per dependent student. Graduate students, who currently account for about half of new federal lending annually, will also face new ceilings: Most programs are capped at $20,500 annually with a $100,000 aggregate maximum, while students in professional programs such as law and medicine may borrow up to $50,000 annually and $200,000 in aggregate.

Repayment Reform

Beginning in 2026, all new borrowers will choose between a single fixed “tiered standard” plan and a new Repayment Assistance Plan (RAP). RAP replaces multiple income-driven repayment (IDR) options with one structure that ties payments to total adjusted gross income rather than discretionary income. The Congressional Budget Office (CBO) estimates RAP will save $271 billion over 10 years.

RAP requires all borrowers to make some payment even at the lowest income levels and extends repayment to 30 years, which increases total payments and lowers long-term government subsidy costs. Borrowers pay 1% of AGI between $10,000 and $20,000; 2 percent between $20,000 and $30,000; and so on, increasing by one percentage point for each additional $10,000 of income until reaching a maximum of 10% for incomes above $100,000. Every borrower must make at least a $10 monthly payment, regardless of income, and receives a $600 annual reduction in required payments for each dependent child.

Any unpaid interest in a given month is automatically waived, and the first $50 of a scheduled payment is credited toward reducing the loan’s principal. Balances remaining after 30 years of qualifying payments are forgiven.

Institutional Accountability

A new “do no harm” standard links federal loan eligibility to graduates’ median earnings after completion. Programs whose graduates earn less than the typical high school graduate (or bachelor’s degree-holder, for graduate programs) risk losing access to student loans.

Changes to Repayment Plans in 2026

Major changes are coming to the federal student loan system in 2026, affecting both new and existing borrowers.

Narrower Repayment Options for New Loans

Starting on July 1, 2026, the federal student loan system will have a much narrower set of repayment options for new loans. The primary options will be:

Standard Plan: A fixed repayment plan with terms between 10 and 25 years, depending on the size of the debt.
Repayment Assistance Plan (RAP): An income-driven plan where payments are a percentage of adjusted gross income.

Transition for Existing Borrowers

If you borrow before July 1, 2026, your repayment plan options aren’t disappearing - at least not yet. You can also use the current income-driven repayment plans - Pay As You Earn (PAYE), Income-Contingent Repayment (ICR), and Income-Based Repayment (IBR) - until they expire in 2028. What’s more, PAYE and ICR will sunset by July 1, 2028. If you’re on PAYE, ICR, or the now-defunct SAVE plan: You’ll need to switch to IBR or RAP by July 1, 2028.

Borrowers on other existing income-driven repayment plans will need to choose between IBR and RAP (or a standard plan).

Changes to Borrowing Limits

Starting on July 1, 2026, the borrowing limits for certain federal student loan types will change. The borrowing limits for Direct Subsidized and Unsubsidized Loans for undergraduate students will mostly remain unchanged.

The OBBBA has also eliminated the Grad PLUS loan program after July 1, 2026. After July 1, grad students’ borrowing will be capped at $20,500 a year. Borrowers working toward a professional graduate degree (think medicine or law) will have their borrowing capped at $50,000 a year. Parents and caregivers who use parent PLUS loans to help students pay for college will also see new loan limits. They will be capped at $65,000 per child.

If you already have student loans, you’ll have access to the previous borrowing limits for three years or until you’ve finished your program.

Other Changes

New federal student loans will no longer be eligible for economic hardship or unemployment deferments. Forbearance will also be limited to a maximum period of nine months during a two-year period.
The American Rescue Act of 2021 exempted student loan forgiveness from federal taxation through the end of 2025.

The Looming Default Cliff

Data indicates that millions of borrowers are struggling to keep up with their payments. Millions of borrowers are in default or delinquent on their loans, raising concerns about a potential "default cliff."

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