The Trump-Driven Shift in Student Loan Policy and Its Market Implications

The Trump administration's 2025 overhaul of federal student loan policy marks a seismic shift in the U.S. higher education and credit markets. By terminating the Saving on a Valuable Education (SAVE) Plan and reviving Income-Driven Repayment (IDR) structures, the administration has recalibrated the financial risk landscape for borrowers, servicers, and the federal budget. These changes, embedded in the One Big Beautiful Bill Act (OBBBA), are reshaping repayment dynamics, borrower behavior, and credit market stability, with far-reaching implications for households and asset classes.

Financial Risk and Borrower Behavior: A New Calculus

The termination of the SAVE Plan-once a cornerstone of Biden-era relief-has left borrowers in a transitional limbo. As of July 1, 2028, the plan will be fully phased out, replaced by the Repayment Assistance Plan (RAP), which bases monthly payments on gross income. This shift eliminates the prior buffer for low-income borrowers, who now face a minimum payment of $10 per month according to data. For households already stretched thin, this could accelerate defaults. A 2025 TICAS survey found that 45% of federal borrowers make tradeoffs between loan payments and basic needs, with 20% already in delinquency or default. The RAP's rigid structure may exacerbate these pressures, particularly for those in volatile industries or with irregular income streams.

Meanwhile, the revival of IDR structures-though limited to existing borrowers-introduces a fragmented system. While the Trump administration has agreed to process forgiveness for those in PAYE and ICR plans, these programs will sunset by 2028. New borrowers are funneled into the RAP, which lacks the flexibility of income-based models. This bifurcation risks creating a two-tiered system: older borrowers with manageable repayment terms and newer borrowers burdened by stricter requirements.

Private Servicers and the Shadow of Default

The policy shift has also recalibrated risks for private student loan servicers. The Trump administration's push to transfer federal loan administration from the Department of Education to the Small Business Administration (SBA) has raised alarms about operational capacity. The SBA, already facing workforce reductions, lacks the legal authority to manage the complex federal loan portfolio, potentially leading to servicing inefficiencies and delayed borrower support.

Simultaneously, private lenders like Sallie Mae and Navient are positioning to capitalize on the transition. With federal borrowing limits for graduate and professional programs capped under the OBBBA, students and parents are increasingly turning to private loans, which carry higher interest rates and fewer protections according to analysis. Sallie Mae has openly advocated for reduced federal borrowing, while Navient has signaled confidence in capturing a share of the expanding private loan market as reported. However, this shift exposes servicers to heightened default risks. The Boston Federal Reserve's analysis of the pandemic-era payment pause showed that federal loan holders improved credit access due to the absence of derogatory marks. Reverting to a private model, where defaults trigger wage garnishment and credit score damage, could reverse these gains and destabilize servicers' portfolios.

Federal Budget Projections: Savings or Scapegoat?

The Congressional Budget Office (CBO) estimates that the federal student loan program will cost taxpayers $393 billion between 2024 and 2034, with $221 billion attributed to expected losses on new loans according to CBO projections. The OBBBA's reforms, including replacing the SAVE Plan with the RAP, are projected to save $350–355 billion over the next decade according to analysis. These savings, however, hinge on optimistic assumptions about borrower compliance and default rates. If the RAP's rigid payment structure drives more borrowers into default, the federal government could face higher administrative costs and reputational damage.

A critical wildcard is the reversal of the American Rescue Plan Act's tax treatment of loan forgiveness. Starting in 2026, forgiven amounts under IDR plans will again be considered taxable income. This change could deter borrowers from enrolling in IDR programs, reducing their effectiveness as a tool for managing debt. For the federal budget, this may mean fewer forgiveness claims but higher tax revenue-a trade-off that remains untested.

Broader Economic Ripple Effects

The policy changes are already reshaping enrollment trends in U.S. higher education. Community colleges have seen a 4.0% enrollment increase in 2025, while public four-year institutions and private colleges grew by 1.9% and 0.9%, respectively according to Deloitte data. Students are gravitating toward affordable, workforce-aligned programs as graduate and professional degrees become less accessible due to loan caps according to Federal Reserve analysis. International enrollment, meanwhile, is projected to drop 15% in fall 2025 due to stricter visa policies as reported.

For asset classes, the looming "default cliff" poses systemic risks. With 57% of borrowers now making monthly payments and 20% behind on obligations, a surge in defaults could strain credit markets. The Federal Reserve's 2025 Economic Well-Being of U.S. Households report highlights that student debt remains a drag on household liquidity, limiting spending and investment. If defaults spike, credit rating agencies may downgrade student loan-backed securities, triggering broader market volatility.

Conclusion: Navigating the New Normal

The Trump-driven overhaul of student loan policy is a double-edged sword. While it promises federal savings and reduced borrowing excesses, it also introduces new vulnerabilities for borrowers, servicers, and the economy. Investors must closely monitor default rates, credit market stability, and the SBA's ability to manage the transition. For households, the path forward is fraught with uncertainty-a reality that underscores the need for contingency planning in an era of shifting financial obligations.