When Congress passed President Trump’s “big, beautiful bill” in July, one of its most profound changes flew under the radar.
The new law includes a set of reforms to fix one of the worst-run federal government programs: the federal student loan system. Under the law, federal student loans will be less burdensome and easier to repay in full.
Attempts at student loan forgiveness under former President Joe Biden sidestepped the underlying problem in the student loan system: The government hands out loans to young people with no questions asked, regardless of whether their borrowing levels are reasonable or whether their chosen degree is likely to pay off.
Consequently, many borrowers can’t afford to pay down their debts. Outstanding balances rise. Either the students languish, or the government steps in to forgive remaining debts that borrowers cannot pay — at considerable cost to taxpayers.
Trump’s One Big Beautiful Bill Act overhauls this broken system. First, the law reforms student loan repayment to ensure borrowers pay down their debts. Then the law strategically limits new loans to ensure that fewer borrowers take on debts they cannot afford.
Under the Obama and Biden administrations, policymakers’ student loan repayment strategy was to slash monthly payments, then forgive remaining debt after a set number of years. But this meant that payments did not cover accrued interest, and millions of borrowers saw their outstanding balances rise instead of fall. As a result, borrowers were stuck with their debt for decades.
Trump’s act dispenses with this failed forgiveness-driven approach. The legislation instead creates a new way for borrowers to repay their loans known as the Repayment Assistance Plan.
Under the Repayment Assistance Plan, borrowers’ payments are tied to their incomes, but as long as borrowers make their payments on time, any unpaid interest not covered by the monthly payment is waived. The plan even credits borrowers’ principal balances to ensure their debts always go down, not up, as long as they are making payments.
Consider a borrower who faces $100 in monthly accrued interest and makes just under $30,000 per year. He might make a monthly income-based payment of only $50.
Under the Repayment Assistance Plan, the government waives the remaining $50 of unpaid interest and credits another $50 towards the borrower’s principal balance. Under previous repayment plans, this borrower’s balance would have risen by $50 every month, but under the new plan, it will fall by $50.
These new benefits might appear to cost money. However, the spending bill offsets the cost because most borrowers no longer receive loan forgiveness under the Repayment Assistance Program.
Moreover, borrowers will pay off their loans faster. The typical college graduate will repay loans in full after just 11 years under the program.
By contrast, under Biden’s signature student loan repayment plan, the same borrower would have paid her debts for 20 years, and it would have cost the government $11,500 to forgive her remaining balance.
Fixing the repayment system, however, isn’t enough. The “big, beautiful bill” also tackles the student loan system’s fundamental problem: borrowers taking on too much debt for education with too little value.
Before the bill, federal loans to graduate students and parents of undergraduate students were effectively unlimited. This led colleges to hike tuition, forcing students to take on ever-larger student debt burdens.
For instance, Columbia University relied on taxpayer-backed loans to fund a master’s degree in film that left students with a median debt burden of $180,000.
And many federally funded degree programs left students worse off economically than they would have been otherwise, often earning less than a high school graduate.
With low earnings and excessive student debt burdens combined, it’s no wonder that so many students are struggling to pay down their debts.
The bill fixes these problems by capping federal student loans at commonsense levels: $20,000 per year for parents, $20,500 for most graduate students, and $50,000 for medical and other professional students.
In addition, the law bars colleges from using federal loans to pay for degree programs where students wind up earning less than a comparable high school diploma holder (or, for graduate programs, than a comparable bachelor’s degree holder).
These reforms will keep student debt to manageable levels and ensure that the worst-performing programs cannot rely on federal loans at all. This means that if students attend affordable colleges and avoid silly majors, they can still access the loan funding they need to pay tuition. But colleges will no longer have a blank check to charge whatever they like, leave students earning far too little, and pass the costs on to taxpayers.
The “big, beautiful bill’s” long-overdue changes to the student loan system will ensure borrowers have affordable payments, don’t run up their balances, and pay off their debts without the need for forgiveness. And going forward, the law will limit excessive debt and deny loans to low-quality academic programs.
Student debt might be a headache for many. But the reforms in the bill are starting to turn things around.
Preston Cooper is a senior fellow at the American Enterprise Institute.
