Student Loan Overhaul: Pell Grants Double, PSLF Drops to 8 Years, and Interest Capitalization Ends

The Lowering Obstacles to Achievement Now Act, or the LOAN Act, is a massive shake-up of federal student aid designed to hit the reset button on affordability and loan repayment. Starting with the 2026–2027 award year, the maximum Federal Pell Grant is set to double, reaching $14,000 by 2031–2032 and indexed to inflation after that (SEC. 101). Crucially, the bill shifts Pell Grant funding to a mandatory mechanism, meaning the money is guaranteed and won't be subject to annual budget fights.

The New Math of College Affordability

This bill makes college a lot more accessible for students with high financial need. Doubling the Pell Grant is a game-changer, especially when combined with the extension of eligibility from 12 semesters (six years) to 18 semesters (nine years) (SEC. 104). This gives students who need to work part-time or take breaks a much longer runway to finish their degree without losing aid.

For those with the highest financial need—where the Student Aid Index (SAI) is negative—the bill grants an extra Pell amount equal to that negative SAI, meaning the poorest students get an even larger grant to cover living expenses (SEC. 102). It also extends federal aid eligibility to "Dreamer students" who meet specific criteria, opening up grants and loans to a group previously locked out of federal aid programs (SEC. 103). This is a huge win for access, but it also means the federal government is committing to a massive, permanent increase in spending—a cost that will land squarely on taxpayers.

End of Interest on Interest: Capitalization Is Out

One of the biggest silent killers of student debt is interest capitalization, where unpaid interest is added to your principal, and you start paying interest on that new, higher amount. The LOAN Act largely kills this practice. It eliminates capitalization in several key areas, including at the end of forbearance periods, on PLUS loans, and during the loan default reduction process (SEC. 301). If you’ve ever had your loan balance spike after a year of forbearance, this change will save you thousands over the life of your loan by ensuring interest only accrues on the original principal.

Another win for the wallet: starting July 1, 2026, the 4.0 percent origination fee currently tacked onto many federal student loans is eliminated (SEC. 202). This means more of the money you borrow actually goes toward tuition, not fees.

PSLF Gets a Major Time Cut and a Second Chance

For public service workers—teachers, nurses, government employees—the Public Service Loan Forgiveness (PSLF) program is getting a massive boost. The required number of qualifying monthly payments is reduced from 120 (10 years) to 96 (8 years) (SEC. 231). This means two years less time you have to spend tethered to a public service job before getting debt relief.

Even better, the bill introduces a “buyback” option. If you missed payments or were in an ineligible deferment/forbearance period while working in public service, you can now make a lump-sum payment equal to what you should have paid to count those past months toward your 96 payments (SEC. 231). This is a lifeline for workers who were previously denied forgiveness due to confusing program rules. The bill also forces the Department of Education to create a new online portal and database to track PSLF progress and verify qualifying jobs, hopefully ending the years of administrative headaches that plagued the program (SEC. 233).

A Simpler, Safer Repayment System

Starting July 1, 2026, the confusing array of old repayment plans is replaced by just two options for new borrowers: a Fixed Repayment Plan and a new Income-Driven Repayment (IDR) Plan (SEC. 212). The new IDR plan offers $0 monthly payments if your income is below 225% of the poverty line. For those with undergraduate loans, the payment is capped at 5% of discretionary income, with forgiveness kicking in after 20 years (25 years for graduate debt).

The bill also addresses delinquency with a straight-shooting approach. If you are 80 days late on a payment, the Secretary will automatically enroll you in the new IDR plan if your calculated IDR payment is lower than your current payment (SEC. 221). This automatic enrollment acts as a safety net, preventing struggling borrowers from spiraling into default. To make this work, the Secretary is authorized to use IRS tax data to calculate payments, though borrowers can opt out and provide documentation manually (SEC. 221).

Refinancing Opportunities for Millions

The LOAN Act creates two major refinancing options (SEC. 402, SEC. 403):

1. Federal Loan Refinancing: Borrowers with existing federal loans (FFEL or Direct Loans) that have an interest rate higher than 5.0 percent can refinance them into a new Direct Loan with a rate fixed at the lesser of the weighted average of their old loans or that 5.0 percent cap (SEC. 402). This is huge for anyone holding older loans with high interest rates, giving millions a chance to lock in a lower rate.

2. Private Loan Refinancing: The bill also creates a Federal Direct Refinanced Private Loan program, allowing qualified borrowers to swap their high-interest private student loans for a new federal loan (SEC. 403). This is a massive relief valve for borrowers trapped in private debt. However, there’s a big catch: these new federal loans are not eligible for any federal income-driven repayment or forgiveness programs, including PSLF (SEC. 403). For borrowers considering this, it’s a trade-off: lower interest and federal protections (like forbearance) in exchange for forfeiting any future forgiveness options. If you expect your income to fluctuate or are aiming for PSLF, this might not be the best option.

Default Is No Longer a Life Sentence

Finally, the bill offers a clean slate for borrowers who have struggled with default. If you pay off a defaulted loan in full, or if you consolidate a defaulted loan into a new Direct Consolidation Loan, the Secretary must immediately instruct credit reporting agencies to remove the record of default from your credit history (SEC. 241, 242). This is a powerful step toward credit rehabilitation, recognizing that resolving the debt should also resolve the negative credit impact.