How 4 of the Federal Megabill’s Education Policies Will Affect States

How 4 of the Federal Megabill's Education Policies Will Affect States

The One Big Beautiful Bill Act offers new roles and considerations for states.

Congress expanded the definition of "qualified expenses" in 529 savings plans to include a broader range of K-12 costs. (Daniel de la Hoz/Getty Images)

The federal budget reconciliation bill includes many new education policies that offer new roles or considerations for states and their legislatures. These policies include scholarship tax credits, Workforce Pell Grants and numerous changes to federal student loan limits and repayment plans.

Major changes to Medicaid and SNAP programs likely will pose significant fiscal questions for state budgets and education spending. Those changes are covered in this NCSL tracker, along with other policies such as the exclusion of farm and small-business assets from student aid eligibility and the expanded use of 529 college savings accounts.

1. Scholarship Tax Credits

The bill creates a new permanent tax credit starting in 2027 for annual individual contributions of up to $1,700 to tax-exempt, scholarship-granting organizations. Scholarships must be awarded to elementary and secondary school students in households with incomes below 300% of an area's median gross income.

State Role and Considerations

The tax credit is offered only in states that elect to participate in the program. That decision may be made by the governor or any other entity designated by state law, including the legislature. Participating states must maintain a list of eligible scholarship-granting organizations that meet certain federal requirements.

The federal tax credit would be reduced by any similar state tax credits that are claimed.

2. Workforce Pell Grants

The law expands the Pell Grant to include short-term programs of eight to 14 weeks that are workforce-aligned and meet performance metrics. The Education Department monitors programs to ensure they have on-time completion and job-placement rates of 70% and that they meet value-added earnings thresholds.

State Role and Considerations

States play a key role in determining which programs are eligible to receive Workforce Pell Grants. Governors, in consultation with state workforce boards, determine whether their programs meet federal criteria. Programs must prepare students for work in high-skill, high-wage jobs or in-demand industry sectors. Programs must also lead to a recognized postsecondary credential or prepare students to pursue additional certificates or degrees.

3. Student Loan Limits

The federal spending bill makes notable changes to borrowing limits for graduate loans and Parent PLUS loans. Undergraduate loan limits remain unchanged; however, colleges and universities are allowed to implement borrowing limits for the first time, so long as the limits are applied consistently within programs. The law also prorates borrowing limits based on enrollment intensity for the first time.

The bill eliminates the Grad PLUS program and modifies the lifetime limits of Direct Unsubsidized Loans. Direct loan limits for graduate programs are maintained at $20,500 annually but reduced to $100,000 lifetime. Limits for professional programs, such as medicine and law, are subject to $50,000 annual caps and a $200,000 lifetime cap.

Borrowing limits are based on the loan principle, not total student debt. This an important distinction because student debt levels upon graduation for unsubsidized loans include accrued interest, which begins on the date of the loan disbursement. Previously, graduate borrowers could choose between Direct Unsubsidized Loans, which were capped at $20,500 annually ($138,500 lifetime), or Grad PLUS loans, which allowed students to borrow up to the cost of attendance set by their school and were not subject to lifetime limits.

The law also limits borrowing for Parent PLUS loans to $20,000 per year per student, with a lifetime cap of $65,000. Similar to Grad PLUS, parents could previously borrow up to the cost of attendance and were not subject to lifetime limits.

These limits go into effect on July 1, 2026. However, borrowers who take out PLUS loans before that date will have access to those programs for either three additional years or their remaining time in program, whichever is less.

State Role and Considerations

The loan limit changes do not pose direct or immediate fiscal implications for states, but could have financial implications for institutions with graduate programs in which net cost of attendance (tuition/fees plus living costs minus financial aid) exceeds federal loan limits. This could constrain borrowing for some programs. According to a recent analysis by the American Enterprise Institute, just 10% of master's students at public universities and just over 40% of medical students today exceed the new annual borrowing limits.

In these cases, new graduate loan limits could discourage student enrollment and lead to lower institutional revenues. However, students may also choose to borrow less than the cost of attendance to stay under limits, pay more costs out-of-pocket or seek supplemental student loans from the private market. Institutions may also offer additional financial aid to lower prices on a targeted basis or lower overall costs.

4. Loan Repayment and Accountability

New Borrowers

New borrowers or those seeking certain loan consolidation after July 1, 2026, will have access to only two new loan repayment plans: a standard repayment plan and a Repayment Assistance Plan.

The new standard repayment plan offers fixed monthly payments, like a mortgage, that are based on the amount borrowed. Repayment timelines start at 10 years for borrowers who originally owe less than $25,000. An additional five years of repayment is added when borrowed amounts cross thresholds in increments of $25,000 (for example, borrowers who owe less than $50,000 but more than $25,000 pay over 15 years; borrowers who owe more than $100,000 pay over 25 years).

The new Repayment Assistance Plan, or RAP, is another version of an income-driven repayment plan, which calculates monthly payments based on a borrower's income. The RAP requires a minimum monthly payment of $10. Monthly payments start at 1% of a borrower's adjusted gross income for incomes between $10,000 and $20,000. Monthly payments increase by 1 percentage point in increments of $10,000, up to a maximum of 10% for borrowers who make more than $100,000. Payments are reduced by $50 for each dependent. Borrowers who make qualifying payments for 30 years will have their remaining balance forgiven.

The RAP includes two subsidies that ensure borrowers see their loan balances decrease each month. Under some existing income-driven repayment plans, a borrower's monthly payments would often be insufficient to cover their principal and interest payments, which caused their balances to increase over time, despite making on-time payments.

First, the RAP waives any interest that is not covered by a borrower's monthly payment. Second, the plan provides a matching subsidy of up to $50 per month toward the loan principal for borrowers who pay down less than $50 of their principal.

Starting on July 1, 2027, new borrowers will no longer have access to the unemployment or economic hardship deferment. They will also only be able to enter into forbearance for nine months over a 24-month period, instead of the current limit of 12 consecutive months with a cumulative limit of three years. All borrowers will be able to rehabilitate their loans out of default up to two times, instead of once under prior law.

Current Borrowers

Borrowers enrolled in standard, graduated, extended or current income-based repayment, or IBR, plans may maintain their current plan but will have access to RAP.

Borrowers who are currently enrolled in the income-contingent payment or ICR, PAYE or SAVE plans must transition to a different repayment plan by July 1, 2028. Borrowers can choose from among the current IBR plan, current standard plans or the new RAP. Borrowers who do not choose will automatically be enrolled in RAP.

The Biden-era SAVE plan, created in 2023, remains under a nationwide court injunction. The nearly 8 million borrowers on the SAVE plan have been placed in forbearance status while the case is decided but will see interest on their loans begin accruing on Aug. 1, 2025.

Colleges and Universities

The law creates a "do no harm" accountability standard that would prohibit loans to undergraduate programs in which most graduates earn less than the median high school graduate in their state. Loans would be prohibited to graduate programs in which most graduates earn less than median bachelor's degree holders in their state in similar fields. Programs would lose eligibility if they failed this standard in two of three years but could appeal the decision.

State Role and Considerations

While the federal loan program is operated by the Department of Education and loan servicing companies, states in recent years have played a stronger role in helping borrowers navigate the changing and often complicated nature of the federal student loan program. Some states have established student loan ombudsmen or advocates to assist borrowers.

Millions of borrowers will need to transition repayment plans in the coming years, while millions are currently in default on their loans or nearing delinquency. Considerable efforts will be required by states and the federal government to ensure every borrower is successfully repaying their loans.

Austin Reid is a federal affairs advisor in NCSL's State-Federal Affairs Division.