As college dorm rooms in the United States fill with fresh sheets and mini fridges, students and their families are facing a new borrowing environment.
President Donald Trump’s “Big Beautiful Bill,” signed into law on July 4, has changed the amount students can ask for – including for graduate education, such as medical and law school – and how the money is to be paid back. The new tax law also aims to increase accountability for colleges in terms of protecting student investment.
The Congressional Budget Office estimates that the bill will cut more than $300 billion in funding for colleges over a 10-year period. The government will also take in funds from increased taxes on wealthy schools with large endowments.
Why We Wrote This
As classes get started on college campuses across the U.S., schools and students are absorbing the changes that the recent law will bring to everything from educational loans to taxes on endowments.
In a survey published this month by U.S. News & World Report, less than a quarter – 20% – of students polled said they fully understand the changes brought by the tax law and what they imply. The “Big Beautiful Bill” has altered the financial landscape in higher education in a number of key areas.
What changes can student borrowers and their families expect?
Starting next July 1, there will be just two repayment options for new loans, reduced from a handful of options, including the Biden-era Saving on a Valuable Education Plan, which is being phased out. The Department of Education has said the new law is “simplifying the student loan repayment system.”
The new options include the Standard Repayment Plan, which features a fixed monthly payment that could be paid off in 10 to 25 years, depending on how much was borrowed. The other is the Repayment Assistance Plan, an income-driven plan that sets monthly payments at 1% to 10% of a borrower’s adjusted gross income. It extends payment to 30 years, up from the previous options of 20 or 25 years. The government’s loan simulator page, where students and their families can figure out the loan terms that are best for them, does not yet reflect the legislative changes.
Longer payment periods and cuts to financial aid will force students to take private loans, for which there is no option for loan forgiveness, says Sabrina Calazans, executive director of the nonprofit Student Debt Crisis Center.
The bill also changes the current Parent Plus loan program by capping borrowing. Currently, parents can borrow the full amount of the cost for children to attend school, minus any other financial aid students receive. Parents have some avenues right now to grandfather existing loan limits and repayments. But starting in July, the aggregate cap will be $65,000, and the annual limit will be $20,000. Parents can borrow for multiple children, but the $65,000 cap applies to each child. The changes, opponents of the bill say, will affect low-income families more. Proponents say the law will force colleges to keep tuition costs in check.
Additionally, Graduate Plus loans, which currently allow borrowers to receive the full amount of costs for graduate school, will be eliminated. Such loans will be capped at a lifetime total of $100,000, or $20,500 per year. Professional grad school loans for law, medical, and dental school, will be capped at $200,000 total, or $50,000 annually.
“Right now, Grad Plus, Parent Plus, they’re essentially a blank check from the federal government. Whatever the college says it needs to charge, the federal government has to give students a loan up to that amount, no questions asked,” says Preston Cooper, a senior fellow at the American Enterprise Institute.
Mr. Cooper wrote an analysis breaking down the percentage of graduate students currently borrowing above the limits listed in the new bill – a percentage that he says is not significant. “About 20 percent of students in master’s degree programs currently borrow above the $20,500 cap,” he wrote. “This share drops to just 10 percent at public institutions, which have lower tuition.”
He acknowledges that students in professional schools might have to turn to private lenders, but that their earnings will put them in the top 10% when they graduate, which should enable them to pay them back.
According to the Association of American Medical Colleges, the average cost for a public medical school education for 2024-2025 was $286,454 and $390,848 for private schools.
A study done in 2006, when the Grad Plus program was created, Mr. Cooper says, showed that when students had access to unlimited loan amounts, schools charged more for tuition. He thinks the schools taking advantage of the program will be forced to rein in tuition after the program’s elimination, which he favors.
For her part, Ms. Calazans envisions that the shift could be dramatic.
“What will happen is folks will either shift their career paths to not even pursue those degrees, especially low-income folks, or we are going to see folks maxing out on their federal aid but also taking on a significant amount of private student loan debt,” she says.
Just over one-third of respondents in the U.S. News & World Report poll said they are considering less schooling as a result of the bill’s provisions.
How does the new law aim to hold colleges and universities more accountable?
Under the new bill, something called the “earnings test” initiative will begin July 1, 2026. Undergraduate programs can lose federal student loan eligibility if their graduates don’t exceed the earnings of the median income for adults with high school diplomas. This is different from the original version of the bill proposed by the House of Representatives, which suggested that colleges pay penalties based on former students’ unpaid federal loans.
The earnings test applies to graduate programs as well, and calls for the same penalties if program graduates don’t earn more than adults with bachelor’s degrees.
The test, Mr. Cooper says, provides accountability “for programs that are producing just egregiously bad outcomes.”
What can schools expect in terms of taxes on endowments?
In a move that could have ripple effects at some of the nation’s wealthiest schools, the new tax bill raises the endowment tax, or excise tax, on those colleges’ investment earnings from the current rate of 1.4% to either 4% or 8%, depending on student enrollment. Private, nonprofit colleges and universities with endowments that equal $500,000 to $750,000 per capita will pay the current rate, but those whose endowments are $750,001 to $2 million will pay 4%. Schools with more than $2 million per student will pay 8%. Schools with fewer than 3,000 enrolled students will be exempt from the new changes.
“The impact of this tax will also be felt far beyond our campus and our hometown,” wrote President Maurie McInnis of Yale University, in a letter to the the campus community on July 3. Yale is one of the schools that will pay 8%. “Taxing universities undermines the education and research that fuel life-saving medical breakthroughs, life-changing innovations, and economic growth in communities across the country and around the globe,” she added.
Yale estimates it will pay $280 million in the first year of the new tax, which starts in 2026. Some experts believe tuition increases might be one result of the tax increases.
“Some of these colleges will be paying more in excise tax than their annual financial aid,” says Mark Kantrowitz, an expert on financial aid.
“The point that these colleges are making,” he says, “is that the federal government is taking money away that could be used for making college more affordable.”
