Savanna Hoffman
The American student loan system has been a topic of debate for many years, with various administrations making changes that have impacted both current and future borrowers. While the official stance is that student and parent borrowers are responsible for repaying their student loans, there have been concerns about the potential burden on taxpayers. This is particularly evident in the case of federal loans, where the government backs the lending, and in instances where there are calls for loan forgiveness. The Biden administration's Income-Driven Repayment (IDR) rule, for example, is estimated to cost taxpayers $558.8 billion over ten years. With a high number of borrowers in default or delinquency, the American taxpayer ultimately shoulders the risk of irresponsible lending.
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What You'll Learn
Student loan repayment plans
Federal student loans in the US are financed by the American people, and taxpayers are being pushed towards a fiscal cliff. While the US Department of Education has stated that student and parent borrowers, not taxpayers, must repay their student loans, there is a bipartisan consensus that taxpayers bear much of the risk when it comes to federal student loans.
The US Department of Education is taking steps to assist borrowers in getting back into repayment plans. They are encouraging borrowers to use the Loan Simulator to estimate monthly payments, determine repayment eligibility, and identify the best repayment plan for their goals. The Department of Education has also introduced an enhanced Income-Driven Repayment (IDR) process, simplifying the time it takes for borrowers to enrol and eliminating the need for annual income recertification.
Congress has reduced the number of repayment plans from seven to two: a standard repayment plan with fixed monthly payments, and an income-based repayment plan. The latter offers loan forgiveness after 20 or 25 years, depending on the loan amount. The Trump Administration has also introduced new lifetime borrowing caps: $100,000 for graduate students, $200,000 for professional degrees like law or medicine, and $65,000 per child for parent borrowers.
The FSA is committed to keeping borrowers informed about their payment options and has launched a communications campaign to emphasise the importance of repayment. They are also reminding borrowers of their obligations and providing resources and support to help them choose the best repayment plan.
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Student loan forgiveness
Federal student loans are financed by the American people, and there are currently 42.7 million borrowers who owe more than $1.6 trillion in student debt. The US Department of Education has stated that student and parent borrowers, not taxpayers, must repay their student loans, and that there will not be any mass loan forgiveness.
However, there are some options for student loan forgiveness for those who qualify. The Public Service Loan Forgiveness (PSLF) program allows federal student loans to be forgiven after 120 qualifying payments (10 years) while working for a qualifying public service employer. Qualifying employers include federal, state, local, or tribal governments, the US military, or certain non-profit organizations.
Additionally, there are income-driven repayment (IDR) plans that cap monthly payments based on income and family size. Depending on the plan, the remaining balance on loans may be forgiven after 20 or 25 years of repayment. This includes periods of deferment, forbearance, and economic hardship.
The US Department of Education is committed to providing clear information and resources to borrowers to help them select the best repayment plan and stay on track. They have also announced that interest will begin accruing on loans as of August 1, and borrowers will have access to an income-based repayment plan.
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Student loan interest deduction
Student loan interest tax deductions can help those facing student debt after college. This deduction lowers your taxable income and could, in some cases, lower your tax bracket. You can subtract up to $2,500 of interest paid from your gross income when calculating your adjusted gross income (AGI). This deduction is above the line, meaning it is an adjustment to your taxable income, and you don't need to itemize your deductions to claim it.
To qualify for the student loan interest deduction, all of the following must apply:
- You paid interest on a qualified student loan in the tax year.
- You are legally obligated to pay interest on a qualified student loan.
- Your filing status is not married filing separately.
- Your modified adjusted gross income (MAGI) is less than a specified amount, which is set annually.
- Neither you nor your spouse, if filing jointly, were claimed as dependents on someone else's tax return.
If you paid $600 or more in interest for the year, your lender will send you a Form 1098-E, Student Loan Interest Statement. The IRS will also receive a copy of this form from the student loan servicer.
If you file a Form 2555, Foreign Earned Income, Form 4563, Exclusion of Income for Bona Fide Residents of American Samoa, or if you exclude income from sources inside Puerto Rico, refer to "Worksheet 4-1, Student Loan Interest Deduction Worksheet" in Publication 970 instead of the worksheet in the Instructions for Form 1040.
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Student debt default
Student loan debt default is a significant concern for many Americans. As of 2021, 5.47% of all student loan debt was in default, with an average of 6.24% of student loan debt in default at any given time. This percentage translates to approximately 471,000 students defaulting since 2011 after the second year of repayment. The median borrower takes 33 months to enter default on their federal loans, and over 20% of associate degree holders have defaulted on their loans.
Several factors increase the risk of defaulting on student loans. Students who attend private for-profit colleges are more likely to default than those attending private non-profit colleges. Additionally, arts and humanities majors from non-selective schools are more likely to default. Race also plays a role, with 21.8% of Black or African American student loan borrowers defaulting on their loans.
The consequences of defaulting on student loans can be severe. Borrowers who default may be subject to wage garnishment, negative impacts on their credit scores, and various collection actions by the Department of Education. The fear of defaulting can cause significant stress and anxiety for borrowers, impacting their financial decisions and overall well-being.
There are options available to borrowers struggling with student loan debt. Loan consolidation is a common method to manage defaulted loans. It involves combining multiple loan debts into one large loan, offering new income-based and extended payment plans. Loan rehabilitation is another option, which can remove the record of default from a borrower's history. Additionally, the Biden administration has implemented widespread federal student loan forgiveness, providing debt cancellation of up to $20,000 for Pell grant recipients and $10,000 for most other non-Pell borrowers. However, it's important to note that forgiven loan amounts may be considered taxable income, resulting in additional tax liabilities.
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Student loan borrowing caps
In 2025, President Donald Trump introduced a massive tax and spending package that included significant changes to federal student loans, dubbed the "one big, beautiful bill." This legislation introduced borrowing caps for federal student loans, which took effect on July 1, 2026, for new borrowers.
- A total lifetime borrowing limit of $257,500 for all federal student loans.
- Unsubsidized student loans for graduate students capped at $20,500 per year with a lifetime loan limit of $100,000.
- Borrowing for professional degrees, such as medicine and law, limited to $50,000 per year and $200,000 over a lifetime.
- Parent borrowing through the federal Parent PLUS loan program capped at $20,000 per year per student and a lifetime limit of $65,000.
- Elimination of Grad PLUS loans, which previously allowed graduate students to borrow up to the full cost of attendance minus any federal aid.
The introduction of these borrowing caps has sparked mixed reactions. Some experts argue that it will help curb soaring tuition costs, which have been outpacing inflation. On the other hand, others are concerned about the impact on students pursuing expensive professional degrees, such as medicine and law, and the potential for students to turn to private lenders to bridge the funding gap.
It is important to note that student loan borrowing caps do not include other forms of financial aid, such as scholarships, grants, and work-study programs, which can provide additional funding for students. Additionally, the caps may vary over time and are subject to changes introduced by different administrations.
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Frequently asked questions
Federal student loans are financed by the American people.
Yes, taxpayers pay for student loan forgiveness. For example, President Biden's income-driven repayment rule will cost American taxpayers $558.8 billion over the next ten years.
The US Department of Education is working with federal student loan servicers to help borrowers get back into repayment. The FSA will also launch an enhanced Income-Driven Repayment (IDR) process, simplifying the time it takes for borrowers to enroll in IDR plans.
There are two main types of repayment plans available for new borrowers: a standard repayment plan with fixed monthly payments and an income-based repayment plan.
