The OBBBA and restarting student loan repayment

After nearly five years of pandemic-era payment pauses, the Trump administration has decisively ended the student loan repayment moratorium and has just completed one of the most significant reforms to the student loan system in a generation.

In May, the Department of Education resumed collection efforts on defaulted federal student loans, marking a significant shift in federal loan policy.

The restart of collections affects millions of borrowers. Currently, more than five million Americans are in default on their student loans and, according to the administration, this number could increase to approximately 10 million within months. Approximately 25 percent of borrowers across the $1.6 trillion federal student loan portfolio are in arrears. 

Beyond restarting collections, the administration has also made significant changes to student loan repayment options. The Biden administration’s Saving on a Valuable Education (SAVE) repayment plan had been suspended and was effectively ended by the “One Big Beautiful Bill Act” (OBBBA). It also faces legal challenges that the current administration is unlikely to defend. After temporarily removing all income-driven repayment applications, the Trump administration reinstated three options: Income-Based Repayment, Pay As You Earn, and Income-Contingent Repayment. 

Some of these proposed reforms, particularly the retention and strengthening of income-based repayment options, could significantly assist lower-income borrowers by reducing their payment burdens and aligning loan repayments with their ability to pay.

All of these are steps in the right direction toward reforming the federal student loan system. 

Biden’s broad-based student loan forgiveness via executive order is problematic in part because it’s regressive—rewarding college graduates who have better earnings profiles than non-college graduates—and only offers a one-time time fix for a much broader structural problem. If a substantial share of all student loans up until now were forgiven, that could that set an expectation and moral hazard that future student loans wouid be forgiven as well.

Under Secretary of Education Linda McMahon’s leadership, the Trump administration has protected taxpayers from bearing the cost of unpaid student debt. Ending the moratorium on student loan repayments is a step in the right direction toward a system that expects federal student loans will largely be repaid, rather than being some sort of bespoke grant without accountability.

As FREOPP has written at length before, long-run education reform should be focused on promoting opportunity and mobility by broadly cracking down on federal subsidies for negative-ROI degree programs. Doing so would help align incentives between universities and the federal government allocating taxpayer dollars. 

Income-based repayment, maintained by the Trump administration, is a better mechanism to align incentives between borrowers and the government that taxes borrowers as a fraction of their post-college earnings rather than charging fixed-rate interest.

There are a number of student loan related-items in the OBBBA that create a new income-based “Repayment Assistance Plan,” eliminates most current repayment plans for future borrowers such as the overly generous Biden-era SAVE plan. It also ends the grad PLUS loan program after July 2026, and reduces eligibility for Public Service Loan Forgiveness. Going forward, grad student borrowing will be capped at $20,500 per year with a lifetime loan limit of $100,000—below the prior limit of $138,500—that would significantly affect borrowing to finance many masters programs under current tuition prices. 

McMahon recently said that “American taxpayers will no longer be forced to serve as collateral for irresponsible student loan policies,” signaling a clear departure from the Biden administration’s approach to student loan management.

The first six months of the second Trump Administration has had no shortage of significant policy developments. On the education side, policy changes are certainly improving incentives for borrowers and colleges, which is the best sustainable long-run path for reforming the federal student loan system.