Student Loan Reform in the United States

The federal student loan system has a structural design problem that sits upstream of most of what borrowers experience. Colleges collect tuition funded by federal loans and bear no financial consequence when their graduates cannot repay, so there is no mechanism pressuring them to contain costs or cut low-value programs. The government issues those loans without assessing whether a given degree program produces graduates who can afford to repay them. Loan servicers are paid a flat fee per account regardless of how well they guide borrowers through available options, so the path of least resistance is to push borrowers into forbearance rather than the repayment plan that would actually help them. And since 1976, student loans have been nearly impossible to discharge in bankruptcy, leaving borrowers who cannot realistically repay with no legal exit that exists for every other form of unsecured consumer debt. The predictable result is tuition inflation, balances that grow even for borrowers meeting every payment requirement, and a large population of borrowers with no realistic path forward. This bill proposes to address each of these structural conditions: it would cap graduate borrowing against program earnings, require colleges to pay fees when graduates consistently fall behind, eliminate interest compounding on federal loans, reform servicer contracts to reward outcomes, restore bankruptcy discharge after five years, and clear the large backlog of unresolved fraud relief claims.

What this bill would change

• Interest stops compounding. Today, unpaid interest is added to the loan principal, which then accrues more interest on a growing base. This bill would end that cycle for all federal Direct Loans, and would also undo the same process for recent periods where it already happened.
• Graduate borrowing limits tied to earnings. The Graduate PLUS loan program currently has no cap on how much a student can borrow. This bill would set annual and aggregate borrowing limits based on what graduates of each specific program actually earn.
• Colleges pay when graduates cannot repay. Currently, institutions face no financial consequence when their graduates default or carry unsustainable debt. This bill would require programs where graduates consistently struggle to repay to pay a fee back to the federal government, scaled to how severe the problem is.
• Servicers rewarded for helping, not ignoring. Loan servicers are currently paid a flat fee per account regardless of how well they help borrowers. This bill would tie up to 15 percent of servicer compensation to outcomes like enrollment in income-driven plans and payment-count accuracy.
• Bankruptcy discharge restored after five years. Federal student loans have been nearly impossible to discharge in bankruptcy since 1976. This bill would allow discharge after five years in repayment through a simplified process.
• Fraud relief backlog cleared on a timeline. The program that forgives loans for students defrauded by their schools has hundreds of thousands of applications waiting with no deadline. This bill would mandate staffing and require all pending claims to be resolved within 24 months.

Let's dig deeper on these changes one by one.

Interest That No Longer Compounds

When a borrower pauses payments, switches repayment plans, or leaves a period of reduced payments, federal law currently requires that any unpaid interest be added to the principal balance. From that point, interest accrues on the larger amount. A borrower can make every required payment on time for years and still owe more than they originally borrowed, because each pause or plan change resets the base on which interest is calculated.

This bill would end that practice for all federal Direct Loans. Instead of being added to the principal, unpaid interest would sit in a separate account that does not itself grow. The bill would also undo this process retroactively for the 24 months before the bill takes effect: borrowers whose balances grew this way would have them restored to the pre-increase amount within 90 days.

For borrowers in an Income-Driven Repayment plan, a type of repayment where monthly payments are calculated as a percentage of income rather than a fixed dollar amount, the bill adds a further protection. Borrowers earning at or below 250 percent of the federal poverty level (roughly $38,000 for a single person in 2026) would have the federal government cover the gap between their required monthly payment and the interest that accrues each month. A borrower making their required payment would not see their balance grow at all. This coverage takes effect once the Congressional Budget Office confirms that fee revenue from the institutional accountability provisions offsets its cost.

Borrowing Limits for Graduate Degrees

The federal Graduate PLUS loan program (Grad PLUS), which allows graduate and professional students to borrow up to the full cost of attendance at any accredited institution with no annual borrowing cap, currently imposes no ceiling tied to what a degree is likely to earn. A law student could borrow $200,000 against a program whose graduates typically earn $60,000 in their first year, and neither the student nor the institution faces any disclosure requirement or loan limit tied to that gap.

This bill would set annual Grad PLUS borrowing at a maximum of 75 percent of the median first-year earnings for graduates in the borrower's field of study, using data from the Department of Education's College Scorecard. The aggregate cap across the full degree program would be 150 percent of median five-year post-graduation earnings in that field. Graduate students committing to five years of qualifying public-interest work, such as teaching at a Title I school (a federally designated school serving predominantly low-income students) or working full-time at a qualifying nonprofit, would be eligible for a higher aggregate cap of 200 percent of their field's five-year earnings median.

The mechanism matters beyond the legal limit itself. By tying borrowing to program-level earnings data, the cap creates financial pressure on institutions to bring tuition prices into alignment with what their graduates can realistically repay. If students can no longer borrow unlimited amounts to cover whatever price an institution sets, institutions have a reason to lower prices or improve outcomes. Before certifying (formally approving and originating) any Grad PLUS loan, institutions would be required to provide borrowers with a standardized disclosure showing median debt at graduation, median earnings at one, five, and ten years post-graduation, and the specific cap that applies to their program.

Financial Accountability for Colleges

Colleges and universities currently face no direct financial consequence when their graduates cannot repay federal loans. An institution sets a price, the federal government finances it, and if the graduate defaults, the institution keeps the tuition while the government absorbs the loss. That structure means schools have no financial reason to consider whether their programs produce outcomes that justify their cost.

This bill would change that by calculating a debt-to-earnings ratio for every degree program at every type of institution: public universities, nonprofit colleges, and for-profit schools alike. If a program's graduates carry average debt exceeding 12 percent of annual earnings for two consecutive years, the institution would owe an annual fee equal to 5 percent of the federal student aid certified for that program. The fee scales to 15 percent for programs where the debt-to-earnings ratio reaches 20 percent or higher. Programs that do not improve their ratios within a corrective action period (a defined window, typically one to two years, during which the institution must show measurable progress) would lose eligibility to certify new federal loans for incoming students, meaning no new students could use federal aid to enroll in that program. Programs that close as a result would pay into a fund covering completion pathways for currently enrolled students.

The fee structure is designed to act as more than a penalty. By linking an institution's own revenue to whether its graduates can repay, the bill creates a financial incentive to lower tuition, improve job placement, or both. To prevent the threshold from penalizing programs that disproportionately serve lower-income and first-generation students, the ratio calculation uses an equity-adjusted earnings benchmark overseen by an independent panel of economists. This means the benchmark against which a program is measured is calibrated to reflect the lower average starting earnings of graduates from lower-income backgrounds, so programs serving those students are not mechanically penalized for outcomes driven by systemic inequality rather than program quality.

Servicer Accountability and Payment Audits

Federal loan servicers, the companies that manage billing, answer borrower questions, and process payments on behalf of the Department of Education, are currently paid a flat fee per account. That structure gives servicers a financial reason to minimize time spent on each borrower: steering someone into forbearance, which pauses payments without requiring the servicer to explain income-driven plans or track qualifying payment counts, takes less time and costs the servicer nothing. Federal regulators and the Consumer Financial Protection Bureau have documented that servicers systematically steered borrowers into forbearance and failed to accurately count qualifying payments toward Public Service Loan Forgiveness (PSLF), which is the federal program that forgives the remaining balance after 120 qualifying monthly payments for borrowers working in public or nonprofit employment.

This bill would convert all new and renewed servicer contracts to outcome-based performance standards. Up to 15 percent of base compensation would depend on Income-Driven Repayment (IDR) enrollment rates, payment-count accuracy, and dispute resolution speed. Servicers who miss minimum performance thresholds for two consecutive quarters would enter a corrective action process (a formal review period with required remediation steps); persistent failure to meet thresholds would trigger contract termination.

Within 24 months of the bill taking effect, the Department would be required to audit the qualifying payment count for every active IDR borrower. The audit would credit any month in which a borrower was in a qualifying repayment status, whether or not the servicer recorded it correctly at the time. Servicers whose error rate exceeds 5 percent of audited accounts would pay into a remediation fund that compensates borrowers directly.

PSLF would be codified as a statutory entitlement under this bill: a legal right, not a regulatory program that a future administration could modify or eliminate without an act of Congress. No future rulemaking could narrow the definition of qualifying employment or add new eligibility conditions. If a complete PSLF application goes unanswered by the Department for 180 days, forgiveness would be automatically granted.

Bankruptcy Discharge

Federal student loans have been nearly impossible to discharge in bankruptcy since the Education Amendments of 1976. The legal standard required borrowers to prove near-total and permanent inability to repay, and doing so required a separate legal proceeding, called an adversary proceeding, that added thousands of dollars in legal costs to a bankruptcy case and that most bankruptcy attorneys declined to take on. The practical result was near-zero discharge rates for student loans, even when borrowers were in genuine long-term financial distress. Every other type of unsecured consumer debt, including debt from a failed business venture, could be discharged in bankruptcy under far less demanding conditions.

This bill would allow federal student loans to be discharged in bankruptcy after five years from the date the first scheduled payment was due. The adversary proceeding requirement would be replaced by a streamlined motion filed within the borrower's existing bankruptcy case. The Department of Education would have 60 days to respond; if the Department does not respond, the court would grant the discharge automatically.

Borrowers who have not yet reached the five-year mark could still seek early discharge under two hardship tiers. A borrower at or below 175 percent of the federal poverty level with no expected income improvement due to medical, disability, or caregiver circumstances would qualify for presumed hardship. A borrower at or below 250 percent of the poverty level with a documented sustained inability to maintain a minimal standard of living while servicing the debt would qualify under a standard hardship showing. The bill requires a statutory review five years after enactment, publishing data on discharge rates, borrower income at filing, and any evidence of strategic default.

Clearing the Fraud Relief Backlog

The Borrower Defense to Repayment (BDR) program allows students who were defrauded by their colleges, typically through false claims about job placement rates, program accreditation, or credit transferability, to apply for federal loan discharge. As of early 2026, the program had hundreds of thousands of pending applications and a small number of staff adjudicators, leaving many applicants waiting years for a decision while their loan balances continued to accrue.

This bill would establish a permanent mandatory staffing ratio of one adjudicator per 2,000 pending applications and require all applications pending at enactment to receive a final determination within 24 months. Applications filed after the bill takes effect would receive a determination within 18 months. When a court or the Department's Inspector General finds that an institution committed fraud, the bill would automatically discharge the federal loan balances of all students who enrolled during the fraud period, without requiring individual applications. A public status dashboard updated monthly would show each application's position in the queue.

How the different political groups see it

Progressive Democrats

Progressive Democrats see the end of interest capitalization as the bill's most meaningful achievement. Unpaid interest can no longer be added to the principal balance, stopping the mechanism that caused balances to grow faster than borrowers could repay even when they made every required payment. They also value the codification of Public Service Loan Forgiveness (PSLF), which forgives the remaining loan balance after 120 qualifying monthly payments for borrowers in public or nonprofit jobs, in statute: the program operated as a regulatory rule for nearly two decades, and early rejection rates above 98 percent, driven mostly by servicer payment-counting errors, left most applicants shut out despite qualifying. Making PSLF a statutory entitlement means a future administration cannot change the eligibility rules or wind down the program without an act of Congress. Automatic discharge if the Department fails to act within 180 days, and a reversed burden of proof on payment counts, are seen as direct remedies for years of documented servicer errors.

What Progressive Democrats gave up is what the bill does not do: it does not authorize broad cancellation of the roughly $1.7 trillion in outstanding federal loans. From their standpoint, that debt accumulated through a system that charged compounding interest on good-faith educational decisions, and the bill repairs the machinery going forward without addressing the accumulated harm. The 20- and 25-year Income-Driven Repayment (IDR) forgiveness timelines, which cancel remaining balances after that many years of payments, remain adjustable by regulation and could be weakened without a congressional vote. There is also no public government servicing option: this group wanted the government to service loans directly, cutting out private servicers whose profit motive creates the incentive failures the servicer reform provisions only partially fix. The five-year bankruptcy waiting period is better than the near-total exclusion that existed before, but not the equal treatment this group sought. Other types of unsecured consumer debt can be discharged immediately, with no waiting period.

Moderate Democrats

Moderate Democrats value the institutional accountability provisions most. The Grad PLUS borrowing cap and the risk-sharing fee together create the first financial feedback loop between what colleges charge and whether graduates can repay: a mechanism the program never had. Servicer reform is a direct fix for a documented incentive failure: servicers were paid per account regardless of outcome, so the path of least resistance was to put struggling borrowers in forbearance rather than the repayment plan that would actually help them. The Public Service Loan Forgiveness (PSLF) codification and the reliance-harm remedy, which gives credit to borrowers who made career decisions around forgiveness programs that were subsequently reversed by the Department, are seen as closing gaps between what the programs promised and what they delivered.

The missing piece for Moderate Democrats is the Pell Grant program, which has lost significant purchasing power relative to tuition over the decades. The maximum Pell Grant today covers a much smaller share of average college costs than it did when the program was designed, which means lower-income students have to borrow more to cover the difference, and end up with the most debt relative to their ability to repay. The bill does not index Pell to tuition levels, does not expand eligibility to part-time students, and does not address that underlying gap. Parent PLUS borrowers, parents who take out federal loans to help fund their children's education with fewer repayment protections than student borrowers have, are also largely unaddressed.

Moderate Republicans

Moderate Republicans see the Grad PLUS cap as the bill's central achievement. Unlimited graduate borrowing against programs with no earnings accountability was the primary mechanism through which federal lending inflated tuitions without restraint: if students can always borrow whatever a program costs, schools have no incentive to compete on price or cut low-value degrees. Capping annual and aggregate borrowing at earnings-indexed levels, with mandatory earnings disclosure before any loan is issued, puts a price signal back into a market that previously had none. The institutional risk-sharing fee, while smaller than some in this group wanted, is valued as the first time institutions bear a direct financial cost for bad graduate outcomes. The requirement that any new executive forgiveness program projected to cost more than $10 billion over ten years receive explicit congressional authorization closes a specific gap that litigation alone had not addressed.

What Moderate Republicans accepted under protest: the bankruptcy discharge restoration after five years, the permanent Borrower Defense to Repayment (BDR) staffing appropriation, and the interest subsidy for lower-income Income-Driven Repayment (IDR) borrowers. The interest subsidy in particular is a federal expenditure whose size depends on IDR enrollment, a number that could grow significantly, making it an open-ended cost. They did not secure provisions allowing private lenders to compete with federal loans in the graduate market, which would have created additional pricing pressure on programs, and did not restrict executive authority over payment pauses.

Conservative Republicans

Conservative Republicans acknowledge that the Grad PLUS earnings cap and the institutional fee structure install the first real feedback mechanism in a program that previously had none, and consider that a genuine improvement. The congressional authorization requirement for large forgiveness programs and the payment floor preventing below-interest monthly payments for higher-income IDR borrowers are valued as partial guardrails. But they are clear-eyed that these are guardrails around the edges of a fundamentally unchanged structure.

The concessions are substantial. Private lenders are not reintroduced to the graduate market. Conservative Republicans see private lenders as the mechanism for real discipline: a private lender that stands to lose money if a borrower defaults has a strong incentive to assess whether a given degree program produces graduates who can realistically repay, and to decline to fund programs that don't. The federal government has no such incentive, which is why the accountability provisions in this bill are, from this group's standpoint, a workaround for a problem that market competition would solve more directly. Income-Driven Repayment (IDR) is now consolidated and made permanent federal statute rather than regulatory policy. IDR allows borrowers to pay a percentage of their income each month rather than the full loan payment, which means borrowers who earn less than expected may repay far less than they borrowed, with the difference covered by taxpayers. This group opposed IDR when it was created by executive rulemaking and now opposes it as entrenched law that cannot be scaled back without a floor vote. Public Service Loan Forgiveness (PSLF) is similarly permanent, with a qualifying nonprofit definition broad enough to include think tanks, advocacy organizations, and trade associations that this group does not consider meaningfully public-serving. The bill leaves undergraduate federal loan maximums untouched, does not restrict executive payment pause authority, and creates no path toward a reduced federal role in higher education finance.

Feasibility

Financial cost. The bill's biggest financial uncertainty is the interest subsidy for lower-income Income-Driven Repayment (IDR) borrowers. That subsidy covers the gap between what a borrower owes each month under their loan terms and what they actually pay under their income-based plan. Its total cost depends on how many people enroll in IDR and what those borrowers earn over time, both of which are hard to forecast. The bill tries to offset this cost with the institutional risk-sharing fees, but those two revenue streams do not move in lockstep: if institutions improve their graduate outcomes in response to the fees, fee revenue falls, while IDR enrollment may keep growing for unrelated reasons. The Grad PLUS borrowing cap is the bill's strongest financial argument in the other direction. If students can borrow less, and if institutions respond by lowering tuition rather than shifting costs elsewhere, the government issues smaller loans and carries less long-run credit risk. That is the intended dynamic, but not a guaranteed one.

Is the spending justified? Two considerations bear on the financial picture beyond the budget score. First, a significant portion of this bill's cost represents a recognition of obligations the federal government has already implicitly incurred, rather than purely new spending. The outstanding federal student loan portfolio stands at roughly $1.7 trillion. The Congressional Budget Office (CBO, the nonpartisan federal agency that scores legislation for its budget impact) already projects that a substantial share of loans in long-term income-driven repayment will be repaid at well below face value. The anti-compounding provision and the interest subsidy do not grow that portfolio; they restructure the terms on which the government expects to collect from it. The bankruptcy discharge provision similarly converts an economic reality, that many borrowers will never fully repay regardless of legal barriers, into a formal process, which may reduce the paper value of the portfolio without changing actual recovery. In this sense, the bill's cost partly reflects recognizing losses that are already embedded in the existing portfolio rather than creating new ones. Second, on a proportional basis, student loan reform operates within a domain where the federal government has already made a foundational financial commitment. The federal government spends roughly $30 billion per year on Pell Grants (need-based grants for low-income undergraduates that do not require repayment) and manages a loan portfolio that dwarfs most other federal credit programs. The broader argument for investing in post-secondary access, that education increases workforce productivity, lifetime earnings, and tax revenue, is well documented in economics research, though it applies most directly to programs where credential value exceeds borrowing cost. That is precisely the gap the institutional accountability provisions are designed to close. For scale: the federal defense budget runs roughly $850 billion per year and the total non-defense discretionary budget roughly $900 billion. The costs of this bill are real but operate within a domain where the government has already committed far larger sums. The policy question is not whether to spend in this domain but whether to restructure the terms on which that spending is delivered.

Political feasibility. The bill is structured to give each major bloc something concrete while asking it to accept something it opposes, which is the shape legislation needs to have in order to pass. Conservative and Moderate Republicans get the Grad PLUS cap and the requirement that large new forgiveness programs receive congressional authorization before taking effect. Progressive Democrats get Public Service Loan Forgiveness (PSLF) locked into statute, safe from future administrative reversal. Moderate Democrats get the institutional accountability framework. The risk is that the compromises frustrate each side enough to withhold support: Progressive Democrats who wanted broad cancellation of existing debt may see the bill as too incremental, while Conservative Republicans who wanted private lending reintroduced may refuse to accept Income-Driven Repayment (IDR) as permanent law. The coalition most likely to carry the bill is Moderate Democrats and Moderate Republicans, who are also the groups whose priorities the bill most directly addresses.

Implementation. The two hardest requirements are the payment-count audit and the Borrower Defense backlog clearance. Reconstructing every Income-Driven Repayment (IDR) borrower's qualifying payment history within 24 months means collecting records from multiple servicers, each running separate data systems with varying record quality, and crediting months that were qualifying regardless of how the servicer logged them at the time. Servicers have historically kept poor records on this, and the systems work required is substantial. The Department has also repeatedly committed to clearing Borrower Defense backlogs in the past and not sustained the effort. A statutory deadline with mandatory staffing ratios is a stronger enforcement mechanism than past administrative commitments, but it still depends on the federal government's ability to hire and retain enough adjudicators quickly. By contrast, the Grad PLUS earnings disclosure requirements rest on data the Department already publishes through the College Scorecard, making them the most technically ready part of the bill. The institutional fee calculations are the main new systems challenge: computing program-level debt-to-earnings ratios and linking them to loan certification has not been done before, and building that infrastructure takes time even when the underlying data exists.