619 | The Student Loan Rulebook Was Rewritten | Travis Hornsby

ChooseFI | Financial Independence Podcast

The episode explores the fundamental restructuring of the US student loan landscape following the 'One Big Beautiful Bill Act.' A critical d

Key takeaways

• The July 2026 date creates two distinct classes of borrowers with different repayment rights.
• New borrowing caps are being implemented: approximately $65,000 total for undergrad and $20,500 per year for graduate programs.

Main topics

• OB3 Act legislation
• IBR vs. RAP repayment plans

Notable quotes

The student loan system has effectively been rewritten.

Conclusion

Understanding the specific timing of your borrowing is essential to na

Transcript preview

Speaker 2 (0:00) Hello and welcome to ChooseFI. Today on the show, we are bringing back Travis Hornsby from the Student Loan Planner. Every few years, Travis comes back on the show to help us make sense of the student loan landscape. And somehow, every single time he does, the rules have changed dramatically. This time, though, it feels bigger than just a simple update. The student loan system has effectively been rewritten. There is now a major dividing line between people who borrowed before July 2026 and those borrowing after it. Repayment options are changing. New borrowing limits could fundamentally alter the economics of graduate school. Parent plus loans have become significantly less attractive and the private student loan market may be about to get much bigger. For existing borrowers, there still are some incredibly valuable strategies hiding in these details. Today, Travis walks us through the new rules, RAP and IBR, the latest on PSLF, the return of the student loan tax bomb, when refinancing makes sense. how your tax strategy can affect your student loan payments, and why students may have far more leverage to negotiate the price of college than they even realize. There's a lot here, but our goal is simple as always. Before we get started, I keep this podcast entirely ad-free for two reasons. First, this is a FI podcast and I don't want to promote products that I don't want you to buy in the first place. And second, I really like the clean listening experience of a show where you don't have to fast-forward ads. To keep it ad-free, All I ask of you as a listener is the next time you open a Travel Rewards credit card, go to choosefi.com slash cards. And with that, on Speaker 1 (1:32) to the show. Speaker 2 (1:36) Figure out which rules apply to you and what, if anything, you should do about it. And with that, welcome to Choose FI. Speaker 2 (1:46) Travis, it is so good to see you. It's been a couple of years. It is fantastic to see you too, Brad. Okay. Every couple of years you come back on, you give us some updates, the lay of the land in the student loan world, and somehow everything changes. Everything is dramatically different. And I know this time is no different. So if you are somebody who hasn't been paying attention to the student loan landscape over the last couple of years, can you give me just the quick three to five minute overview of what people need to know? today? Like what's the high level elevator pitch? Speaker 1 (2:17) I've been on the podcast for choose if I lucky enough to be repeat guests. The problem is, is if somebody were to go back and listen to those episodes, they would have to like tear up. You can't really tear up a podcast, right? Throw your phone across the room or so. I don't know what the equivalent is, but you'd have to say like, I have to relearn the paradigm of what Travis talked about in those episodes. Cause what the episode said in the past is. Your student loans are basically either a debt or a tax, and there's unlimited borrowing allowed. Anybody can take out whatever amount of debt they want to take out for pretty much any program in graduate school at all. If you have undergrad, you can have your parent take out as much debt as you want them to for you. So basically, anybody can go to any school in the country for unlimited amounts of money, and you can just graduate and pay back a percent of your income, or for undergrad only, a percent of your parents' income. And that would make, essentially, the schools able to charge anything. What tends to happen is a lot of Chooseify listeners, of course, are a special population where a lot of them have already planned really well in their college years and don't have huge amounts of student loan debt. But a second subset of folks found FI later in life, right, or found it after graduating from graduate school where they already made a bunch of life decisions that might have involved them needing to borrow six figures of student loans. We've helped a lot of Chooseify listeners over the years that were in that second camp. of people who came out of school with this huge amount of debt and needed to figure out a smarter way to tackle it besides live on rice and beans and put every dollar you make towards student loans. That's not the only path. What has changed is this bill called OB3, One Big Beautiful Bill Act. It was the signature domestic legislative bill of the second Trump administration. If I think about that bill, And what it did in terms of student loans, it put hard caps on the amounts people can borrow in the future years. But it used to be you could borrow kind of as much as you want or whatever. And now, you know, a parent can get $65,000 for a kid for undergrad. Speaker 2 (4:18) In total, $65,000 per kid. Yeah, Speaker 1 (4:21) approximately. Yeah. And then for graduate school, you can take out $20,500. That's per year. So that's a pretty low limit. And if you're doing a professional school program, then it's $50,000 per year. The total limit for professional school is basically $200,000. Those are way lower limits than it used to be. Because we would have dental students that would be dentists or physicians or veterinarians or lawyers that found FI late in life or later in life in their 20s or 30s when they already had the debt, right? And they would have $300,000, $400,000, $500,000 of student debt sometimes. And so the going forward regime of student loans will be that they are hard capped. Like you will not be able to borrow more than a certain amount. And they also are sunsetting all, and really this is a sunsetting versus like a hard stop for most people. So like people that have already borrowed and they're still in their programs, they borrowed before July 2026, they are kind of grandfathered in. Okay. You know, with some of the borrowing limits and some of the repayment plans. as long as they don't take out any new debt after July 2026. That's for the repayment plans restrictions. Basically, the thing that people need to know is we're going from this borrow as much as you want, pay very little to a program of you can only borrow a set amount and it's capped. And instead of having like eight or nine different repayment plans, there's going to be two. That's it. The tiered standard plan and the repayment assistance plan for all people taking out loans after. July 2026. So essentially, you take out one new loan after July 2026, you're stuck with the tiered standard plan or the repayment assistance plan. If you borrowed all your loans before July 2026, you're operating on some of the old rules in terms of what plans you have available to you in terms of what you can do with your loans, right? So essentially, what we've created is two sets of groups of people. You've got the people pre-July 2026 and the people post-July 2026. and we're recording this in September of 2026, that means that the vast majority of people listening to this are in that before July 2026 camp, and therefore they still have access to a lot of the strategies that we use to save people a lot of money. So we still are doing a lot of consults. Full disclosure, we've been a partner with you guys for years, and you all sent us a lot of consultation business over the years. We're still going to be able to help people in that post-July borrowing camp, but there's fewer tools, right? So think about it kind of like, There's a gazillion tools to save people money and a gazillion loopholes. And now that book, there's still a book, but it's a much slimmer book of loopholes and tricks. And people are going to disproportionately need to pay back their loans who are borrowing after July 2026. That's going to become more and more common where people don't have a good alternative path to paying back their debt. Speaker 2 (7:10) Interesting. So now the pre-July 1st, 2026, that alternate path was basically... IBR, as I understand it, right? So income-driven repayment. Talk about that because a lot of people might not be familiar with that. Speaker 1 (7:21) Yeah. So for the pre-July crowd, basically they simplified everything to really two plans going forward. So those are the people that have options because they borrowed all their loans before July 2026. The first one is the income-based repayment, IBR. People might have heard that name before. That has got two flavors to it. If you borrowed any loans before 2014, then you're paying 15 % of your income. If you took out your loans after July 2014 only, then you're paying 10 % of your income. And so if you're in the private sector, then if you're on the new version of that IBR, you'd be paying for 20 years. If you're on the old version, you'd be paying for 25 years. So there's a window of people, this is why this gets complicated, there's a window of people who borrowed all their student loans between July 2014 and July 2026. That group of people that borrowed exclusively during that 12-year window, has access to paying 10 % of income for 20 years, which is very attractive when you're looking at forgiveness math. So those people are in great shape to potentially go for forgiveness in the private sector. And the people who borrowed before July 2014, they have access to the old income-based plan, that's the higher payments. And then both of those crowds have access as well to the new repayment assistance plan. which is the only plan available to people who borrowed everything after July 2026. So think about it like people before that July 2026 date have two income-based options. People who borrow after that July 2026 date have one income-based option they can pay on. So they're really trying to simplify it. And the reason they did it the way they did it is because the Senate parliamentarian said you can't make all these changes that impact current people that already took out loans with already existing conditions. They let them get away with some things, like they stripped out some of the repayment plans, like the pay plan, the ICR plan. So they allow them to get rid of some of those payment plans and sunset them so that people will have to make a simpler decision of, do I do IBR or RAP or pay it back? Those are three paths, right? And the going forward path is going to be, well, do I do the repayment assistance plan, the RAP plan, or do I pay it back? So it's two paths instead of three. And if you're a public servant, the only added complexity is if you're a public servant, then you can pay on an income-based plan for 10 years instead of 20 or 25. And then the repayment assistance plan, the RAP plan, is actually 30 years. So it's a longer term as well. There's a lot going on. They are trying to make it harder to get forgiveness. That's the highlight. Speaker 2 (9:52) Okay, the RAP. 30 years. That's for post-7-1-2026. Is there a percentage that people can go on or is it not as simple as just saying one percentage? Speaker 1 (10:02) Yeah, it is 10 % of your income is over $100,000. And then it is 1 % to 10%, give or take, if you're less than $100,000. There's a stepwise function that determines what percent of your income it is below that level. And there's a lot of simplification. We used to be able to do stuff with family size and who claimed what kid and stuff like that. Now you just get $50 per dependent off your monthly payment. There's no complex calculations. It's just a flat amount. It is a major simplification going forward. The problem is, is in this interim period of like the rest of the 2020s, where some people are grandfathered into these old loan limits, it's going to be really confusing mass the next two, three years. So the next two, three years, you know, I like to joke to my wife about, I love amateur astronomy. It's my big hobby, right? So I like to joke to her, like, I'm going to be super busy in the next two or three years. And then I need to be ready to pivot to having a telescope shop in the mall, you know? I'm joking a little bit, but that's kind of the vibe of student loan policy these days, unless the Democrats win in 2028, and then it probably will get super complicated again. Speaker 2 (11:03) That's an interesting takeaway, though, obviously, amidst the jokes. You actually think this is significant simplification of it? Speaker 1 (11:11) It is, absolutely. But it's only simplification when people are no longer to borrow the unlimited sum. So basically what they did is they said, let's say you're a second year. dental student in an NYU or a USC, right? You need to borrow $150,000 a year. If you have a $50,000 a year loan cap, you will probably not get underwritten by a private lender for that extra $100,000 you need to finish your degree. And so then that person would probably have to drop out of school. They did not want that to happen. And so during the One Big Beautiful Bill Act writing, essentially what they said is, well, let's grandfather that second year dental student in and let them continue. finishing out their degree program and let them borrow unlimited sums. And so basically by mid-2029, all that grandfathering is Speaker 2 (11:57) over with. Speaker 1 (11:58) So that's why I said next two or three years, I'm going to still be really busy with our SLP team because we'll still be having people coming out with huge balances that still need a lot of custom help and strategies. And it greatly simplifies things when you come out with $200,000 of debt from grad school. you have to pay for 30 years, a lot of people are going to look at that and say, you know, I'd rather get in on a 20-year fixed refinancing plan, or I'd rather get my mom or dad to help me out and get a loan from them and pay them back or something, right? So we'll see a lot more simplification of student loans if nothing changes. But what I've learned in 10 years of doing this is somebody takes power unexpectedly, they have different ideas about how student loans should work, and then they... take a sledgehammer to what the other party did and then it's different. So there's a chance that that's going to be totally different. But what this is going to do is put an enormous amount of pressure on colleges and universities. I mean, that's one thing that is not at all being looked at carefully enough in my view is we're going to have, I think, mass layoffs in the higher ed sector broadly because of this legislation, but we're not going to see the impacts until one or two or three years from now in full. Speaker 2 (13:04) Interesting. And that was actually my next... Kind of question slash thought experiment. It's a little early considering we're only two months past the July 1st implementation of this. Do you have any reason to believe that college costs are actually going to be reduced? Everything's about incentives in life, right? And I have to imagine that whoever were the writers of this original bill had it in, if not the back of their minds, then probably the forefront of their minds that, hey, maybe if we make these caps. significantly lower than they used to be, there's no way to make up the difference in terms of paying for these schools. So maybe the $80,000 a year has to be forced down. And I wonder, is that what you're implying with the mass layoffs, that costs are going to have to come down? Speaker 1 (13:49) Well, costs will come down, but I'll make an analogy about how, just a personal analogy, I recently had a dehumidifier installed in our house because it's super hot. We live in the South, right? You know this struggle. And the person was trying to help me get less humidity in the air, but they didn't tie it into the plumbing right. And then so the plumbing kind of destroyed our kid's bathroom because it leaked through the ceiling. So what I mean by that is you can have bad side effects to things with good things that are also happening. What I think is probably going to happen is, yes, costs are going to come down. But what will probably also happen is what we're hearing from with universities is they are going deep into their waiting lists. to try to get wealthy students who can pay higher amounts. And so I think what you're going to see is like the, you know, for some of the high cost programs, I think the standards are going to decline because they're going to take people who can pay, right? If you can pay, you can come. Or if you can pay a lot, you're, you know, you can come. And so I think that that's where we're going to see is instead of this more level playing field where, you know, yeah, a middle class person can attend, you know, a high cost grad program and pay full freight. and pay a percent of their income, I think that the most prestigious programs are going to be able to go deep into their waiting lists. I think where we're going to see the layoffs and the struggles are among the not super elite institutions without the big name brand fan bases. big football school of the world, I think is probably pretty safe because there's way more people that want to go to that school than can get in, right? The ratio is just really skewed. And, you