How the Big Beautiful Bill Changes Financial Aid for College

The One Big Beautiful Bill Act has worked its way from the House to the Senate and back again, and it’s now been signed into law by the president. Let’s break down what’s changing — and what’s not — about financial aid for college students and their parents.

First, because this bill was signed on July 4, and the financial aid year goes from July 1 of one year to July 1 of the next, any changes won’t go into effect until July 1 of 2026.

And some good news for current college students (and those about to enter for the ’25-’26 school year) is that they’re grandfathered into a lot of the old rules through their fourth year of college. That doesn’t mean there’s nothing changing for them or that there’s nothing for them to do, but it does mean they’ll dodge some of the changes.

Let’s start with what’s NOT changing.

The original draft of this bill from the House slashed the Pell grant from a maximum $7,395 a year to $5,710 a year. But by the time the Senate did their part, that change was stripped out. The Pell grant isn’t going up — which it typically does from one year to the next, and which it hasn’t done since Republicans took control of the house in 2022 — but it won’t go down with this bill either.

Another proposed change to the Pell grant that won’t happen is the increase from 12 credit hours to 15 credit hours per semester to be considered a full-time student and qualify for the maximum Pell grant.

If this change had gone into effect, it also would’ve changed big things for soldiers and vets using the G.I. bill, so it’ll be business as usual, where 12 credits and above will continue to count as “full-time“ for all federal benefits. Again, the Senate took that change out of the bill before sending it back to the House for final passage.

And one final thing that was thought to be on the chopping block but will no longer change: students pursuing their bachelor’s degree will still have access to both the subsidized and unsubsidized Direct student loan. In the original House version of the bill, the subsidized student loan got the ax. But the Senate took that cut out, so the subsidized loan — which allows needy students to pay no interest while in college — has survived. Again, business as usual for the foreseeable future.

Now let’s talk about what’s changing.

The official federally recognized cost of attendance for a college includes both direct costs (that’s tuition, fees, room, and board, paid directly to a college), as well as the indirect costs (like books, school supplies, travel expenses, living expenses, and interest due on unsubsidized student loans).

As long as the Pell grant has been around, it could be used for any of those costs. But starting with the ’26-’27 school year, Pell grants will only be applicable to direct costs.

That means that, if a student is getting enough money in scholarships and grants — either from the college or some other source — to cover the entire direct college costs (tuition, fees, room, and board), they won’t be able to get the Pell grant to cover those indirect costs, even if their low income and low assets would otherwise qualify them for the Pell grant.

Another Pell grant change is that students attending certain vocational programs outside the traditional college ecosystem will now have access to Pell grants to cover some or all of those costs.

A positive change to how need-based aid is calculated overall has to do with which family assets are included on the FAFSA. Until the FAFSA simplification act of 2020, small businesses with under 100 employees and family farms were exempt. When that change went into effect two years ago, those exemptions disappeared.

The One Big Beautiful Bill Act reinstates both of those exemptions and adds a third for fishing boats akin to a family farm, just on the water. (I haven’t seen exact text that specifies the 100-employee threshold yet. But hopefully that’ll be clarified before the FAFSA opens on October 1, so we can provide families with accurate guidance then.)

The biggest change for undergraduate college students actually has to do with the Direct PLUS loan, often referred to as the “Parent PLUS“ loan, because it’s a federal loan parents can take out.

Historically, the Direct PLUS loan could be borrowed up to a college’s official cost of attendance. That means, if a student’s college cost $50,000 a year, parents could borrow some or all of that to pay the bill and put their kid through college.

But now, starting July 1 of 2026, for the first time, the maximum amount a household will be able to borrow is $20,000 per year per student and $65,000 in total, over four years, on behalf of that student’s bill.

So let’s say the college costs $50,000 a year, and the family could afford to pay $20,000 of it; they used to be able to borrow the other $30,000, but now they’ll only be able to borrow $20,000. And even then, they’ll only be able to borrow that $20,000 a year for the first three years of college, while in the fourth and hopefully final year, they’ll only be able to borrow $5000 before maxing out the $65,000 limit.

And even if these limits seem high and fair to cover the costs at some schools today, the cost of attending college in America typically increases by about 3-5% a year, so a decade or two from now, these loans that used to cover as much as families needed may barely make a dent.

The good news for my students in New Jersey is that their parents may have access to the NJ CLASS loan, which is still available up to the cost of attendance, provided the borrower has at least a 670 credit score and $40,000 in adjusted annual income.

But outside of New Jersey – and any other states that may offer student loans to residents like New Jersey does — what will the results of this be?

I suppose it could go a few different ways:

Some students will choose less expensive colleges that they can afford.

Some students and parents will wind up taking out private loans to cover the difference.

Other students will choose not to go to college, or to spread out their college education over more years, which both is more expensive in the long run and historically leads to lower graduation rates and more borrowers with student loan debts without a college degree.

All of this will also put pressure on colleges to create more need-based grants to help students bring down their direct costs of attending.

But considering that a college costs money to operate, and even the biggest endowment isn’t bottomless, it may also push colleges to give more weight to whether an applicant can afford to pay the bill in deciding who to accept. So students with greater financial need may see lower college acceptance rates, and students from more affluent families may have an even easier time getting admitted.

Now, I mentioned at the top of this that students already in college are grandfathered in under some of the old rules. So, while I usually advise families to borrow as little as they need to, and as late as they can afford to, it may be important for parents of current college students to at least take out some Direct PLUS loan money in this upcoming ’25-’26 school year to preserve their ability to continue borrowing this loan — up to the cost of attendance or as needed — for up to four years of college.

I generally work with high school students and parents focusing on undergraduate studies. But worth mentioning is that the Grad PLUS loan, for students enrolled in graduate studies, is getting canceled. It will no longer be available starting in the ’26-’27 school year, with the same grandfathered exception to previously enrolled students.

Graduate students will still be able to borrow the direct student loan, but with a cap of $20,500 per year and $100,000 overall, and with an exception for professional studies like med school and law school, where the borrowing limit will be a much higher $50,000 a year and $200,000 overall.

The last change I’ll tackle today has to do with loan repayment.

For years, borrowers have been able to enroll in a variety of income-driven repayment plans, which include a 150% living allowance tied to the poverty line and require payment of 10% of their income thereafter.

President Biden‘s SAVE act sought to increase the living allowance by 50% and reduce the payment percent by half. But that’s been challenged in court, and it looks like it won’t go through.

But even if it does, all prior income-based repayment plans will be terminated by July 1 of 2028 and replaced with the new Repayment Assistance Plan, or RAP.

There’s a lot to unpack in this, but I’ll try to focus on the highlights.

Borrowers will still have the option of paying off their debt in 10 to 25 years, with a fixed monthly payment. But their other option, RAP, does away with the living allowance tied to the poverty line, while starting the payment percent a lot lower.

For every $10,000 borrowers earn, their payment will increase by one percent. So $10,000 is one percent, $20,000 is 2%, and so on, until a borrower is making over $100,000 a year, when their loan payment will max out at 10% of their income.

There’s also a $50 a month dispensation per child dependent on the borrower.

The minimum payment is $10 a month, no longer $0, but it sounds like any unpaid interest will be forgiven, and the federal government will subsidize a match toward loan principle of up to $50 a month. Together, those mean you’re always making progress on your loan, and your debt never grows during repayment — both good things.

But now, instead of having any remaining balance forgiven after 240 consecutive on-time monthly payments (20 years), it will be 360 months (30 years).

Two major problems with this are the marriage penalty and inflation.

Two individuals each earning $50,000 a year would be on the hook for 5% of their income, or $2500 a year each. But if they get married, their new combined income is $100,000 a year, putting both of them on the hook for 10% of that, or $10,000 a year each. That quadruples their payments on the same income. (Unless the tiers are graduated, like income tax, which I haven’t seen any language about, but which may be clarified by July 1 of 2028, when the requirement goes into effect.)

And unlike past income-driven repayment plans that tied a living allowance to the annually adjusting poverty line, these brackets every $10,000 are fixed. So as inflation rises and the cost of living increases, borrowers whose income increases to meet the rising cost of living will also be on the hook for higher student loan payments each month — a double cost-of-living-increase whammy.

It reminds me of how the seventh amendment to the Constitution guarantees the right to trial by jury for any civil matter in excess of $20 — a lot then, but quaint now.

Some of these loan changes are good for borrowers, and others are bad. But if a borrower entered into a repayment agreement with any other lending institution than the federal government, this kind of mandatory change would be illegal.

I expect we’ll get more clarity by July 1 of 2026, when most of this goes into effect. And as I explain every year, different administrations have different priorities, and who’s elected makes the rules. So we could easily see some of these things change with the next Congress or the next President, and on and on. But as of now, these are the new rules by which we’ll all live for the foreseeable future.

I’ll keep keeping you posted when we know more for sure. And I’ll have all of this put together with slides and charts by the time our Financial Aid Nights at local high schools this fall rolls around.

If you have more questions, have fun reading ~1000 pages at Congress.gov. And I’m always happy to answer what I can at 732-556-8220. We are here to help.