Education Department Updates Student Loan Guidance For Key Change To Repayment Plan

The Department of Education updated key guidance this month to reflect an anticipated timeline for changes to a critical federal student loan repayment plan. According to the new guidance, a major fix to a popular income-driven plan is expected to happen in December 2025, potentially allowing more federal student loans to enroll by then.

Income-Based Repayment, or IBR, is the only current income-driven repayment plan program that will be preserved under the One Big, Beautiful Bill Act (or “OBBBA”) that congressional Republicans and President Donald Trump enacted earlier this summer. Three other IDR plans including Income-Contingent Repayment, Pay As Earn, and the Saving on a Valuable Education plan will be phased out. ICR and PAYE will remain in place until 2028, while the phaseout of SAVE (which has been blocked since last year due to a legal challenge) could happen on a faster timeline depending on an anticipated court ruling or settlement next year. The OBBBA also creates a new income-driven plan called the Repayment Assistance Plan, or RAP. But RAP would have a 30-year repayment term before a borrower can qualify for student loan forgiveness, compared to 20- or 25-years under current plans.

To somewhat offset the loss of the other IDR options, the OBBBA expanded the IBR plan by removing a key enrollment barrier tied to a borrower’s debt-to-income ratio. The change to the law was immediate. But the Education Department’s implementation of that update was not. That has resulted in some borrowers being unable to enroll in IBR and, in some cases, unable to qualify for student loan forgiveness as a result. This may be about to change, according to the department’s new guidance.

IBR Rule Can Prevent Some Student Loan Borrowers From Enrolling

The issue with IBR is what’s called the “Partial Financial Hardship” rule. Under the original legislation that enacted IBR, a student loan borrower can only enroll in the program if they have a partial financial hardship. To have a partial financial hardship, a borrower’s calculated monthly payment based on their income must be less than the monthly payment amount needed to pay off their student loans in full over a 10-year period. If a borrower’s income results in a payment that exceeds that amount, and they haven’t already enrolled in IBR, they cannot get into the program.

In contrast, if a student loan borrower is already enrolled in IBR and then they earn a higher income such that they no longer have a partial financial hardship, their IBR payments would just be capped at the equivalent of the 10-year Standard plan amount.

“IDR plans calculate your monthly payment amount based on your income and family size,” says the Department of Education in a summary on its website. “So if your income increases, so does your payment amount. On PAYE and IBR, we limit your payments so that even if your income increases, your payments never go higher than what you’d pay on the Standard Plan.”

Hardship Rule Eliminated For Student Loan Borrowers In IBR, But Education Department Hasn’t Updated Its Systems

Under the OBBBA, the partial financial hardship rule for IBR was immediately repealed. This was designed to ease and expand the enrollment of student loans in IBR given the sunsetting of ICR, PAYE, and SAVE. Since monthly payments made under these other IDR plans can also count toward 20- or 25-year student loan forgiveness under IBR (as well as toward Public Service Loan Forgiveness, or PSLF), the removal of the partial financial hardship rule would allow impacted borrowers to transition to IBR and maintain their progress toward eventual loan forgiveness under IDR and PSLF, regardless of their debt-to-income ratio.

“Previously, borrowers were required to have partial financial hardship and to not have certain types of ineligible loans in order to enter an IBR Plan,” says Department of Education guidance. “With the passage of OBBBA, the IBR Plan now has updated eligibility criteria that allow the following types of borrowers to enroll borrowers who don’t have partial financial hardship”

The OBBBA maintains a cap on monthly payments for IBR borrowers equivalent to the 10-year Standard plan.

“Though OBBBA removes the requirement to have partial financial hardship to enroll in the IBR Plan, monthly payment amounts under IBR will continue to be capped at an amount equivalent to the Standard Repayment Plan with a 10-year repayment period,” says the department. “This means that payments on the IBR Plan will never be higher than payments on a Standard Repayment Plan with a 10-year repayment period.”

But the Department of Education has been slow to implement the removal of the partial financial hardship rule. Although the change in the law was immediate upon passage of the OBBBA in July, the department and its loan servicers have been rejecting student loan borrowers who are applying to IBR but do not have a partial financial hardship due to their debt-to-income ratio.

Department Of Education Agrees To Allow Student Loan Borrowers With No Partial Financial Hardship To Enroll In IBR

In a lawsuit filed earlier this year, the American Federation of Teachers argued that the department was unlawfully denying borrowers access to IBR by failing to comply with the new requirements under the OBBBA.

In October, the department entered into a formal agreement with the AFT, and affirmed that borrowers who do not have a partial financial hardship would be able to enroll in IBR once the department updates its systems to reflect the change to the law. In the meantime, the department promised to stop rejecting IBR applicants on this basis, and instead would hold onto the applications until the system updates were completed.

“The defendants shall not deny as ineligible any borrower applying for the IBR plan on the ground that the borrower lacks a ‘partial financial hardship,’ as previously defined by Section 493C(a)(3) of the Higher Education Act of 1965, 20 U.S.C. § 1098e(a)(3) (2024), and that the defendants shall hold such borrowers’ applications in abeyance until the defendants update their systems to allow for proper processing of these applications,” reads the agreement. “It is further ordered that the defendants shall indicate on studentaid.gov that borrowers who applied for the IBR plan on or after July 4, 2025, and were denied on the basis that they lacked a partial financial hardship are invited to reapply.”

Education Department Provides Timeline For IBR Change For Student Loan Borrowers

Last week, the Department of Education updated its online guidance to indicate that officials anticipate completing system updates in December, which will allow borrowers with no partial financial hardship to enroll their federal student loans in IBR.

“We are working to update both our systems and our loan servicers’ systems to implement these changes,” says Education Department guidance updated on November 14. “We anticipate that the system changes will be completed in December 2025. In the meantime, servicers will hold IBR applications that would otherwise be denied. Servicers will process those applications after the system changes are completed. We encourage borrowers who applied for the IBR Plan and were denied due to lack of partial financial hardship before we instructed servicers to hold these applications to reapply.”

Given the above timeline, borrowers who are trying to enroll in IBR because they have reached their eligibility threshold for student loan forgiveness are unlikely to complete enrollment before the end of this year. That’s important because student loan forgiveness under income-driven repayment plans becomes potentially taxable again starting in 2026. However, under the department’s agreement, borrowers whose student loans officially reach their loan forgiveness eligibility milestone in 2025 should be shielded from federal tax liability, even if their discharge is delayed until next year.