GOP Student Loan Repayment Plan Could Push Millions Toward Default, and Into Subprime Channels

A new Senate Republican bill to reform federal student loan repayments is coming under fire by consumer advocates who warn that its enactment could destabilize millions of American families.

An influx of new subprime consumers would expand the target market for lenders operating in that space, but it would also raise risk profiles and potential regulatory scrutiny.

A large-scale shift from performing to distressed debt could reshape demand, pricing models, and risk management practices across the subprime landscape.

Introduced by the Senate Committee on Health, Education, Labor, and Pensions last week, the bill reduces the choices new borrowers have of repayment plans and lengthens repayment times.

The bill, called a recipe for disaster by Institute for College Access & Success President Sameer Gadkaree, would make debt more difficult for students to repay and would create “an avalanche of student loan defaults,” he said.

The Institute is among a handful of groups sounding alarm bells over the potential trickle-down effects, particularly for financially struggling borrowers.

Over 42 million Americans carry federal student loans, collectively owing more than $1.6 trillion. Over 5 million borrowers were already in default in April, according to the Trump administration. That figure will potentially double to 10 million if the bill becomes law.

The bill would become effective July 1, 2026, and would affect only new federal student loan borrowers. It would abolish all existing sets of repayment plans and set only two in place:

A fixed 10- to 25-year payment period based on debt burden. Individuals carrying more than $100,000 in loans would be given a 25-year payback period.

A new income-based plan, known as the Repayment Assistance Plan (RAP), that calculates payments between 1% and 10% of a borrower’s adjusted gross income. The minimums per month would be established at $10 and forgiveness would not occur until after 30 years.

Unlike the more expansive forgiveness time frames and reduced payments based on discretionary income provided under the SAVE plan, the Repayment Assistance Plan is more burdensome for low-income borrowers.

The average borrower’s annual payments under the Repayment Assistance Plan are likely to be almost $3,000 more, according to the estimate made by the Student Borrower Protection Center.

Default becomes more probable as millions of borrowers are saddled with higher monthly payments and lose access to more favorable income-driven offerings.

Borrowers with recent derogatory marks to their credit report might be shut out from traditional credit sources and directed toward subprime offerings like personal installment loans, BNPL financing, and secured credit cards.

Nonprime lenders need to be ready for an influx of consumers with falling credit scores caused by student loan defaults. The most recent data already reflects an increase in late payments after the federal pause ended.

The trend may gain further momentum if the Repayment Assistance Plan is enacted, making models that rely on risk-based pricing more complicated.

This shift in policy may also create demand for credit repair and credit-building products.

Firms supplying products such as secured credit card, tradeline reporting, or rent report services might realize a new market among student loan borrowers seeking to recover from default.

Subprime lenders are poised for potential exposure given that the federal government has had its focus set squarely on borrower protections.

An increase in high-interest lending to borrowers who have defaulted on their student loans could draw the attention of the CFPB and state attorneys general. The time for transparency and compliance is more essential than ever.

Subprime lenders should reassess whether and how to factor student loan defaults into credit decisions because standard scorecards may be underestimating debt burden for these borrowers.

Tailor Product Lines: Institutions could introduce new products like hardship personal loans, financial coaching initiatives, or adjusted approval levels that favor post-default recovery.

Monitor Policy Developments: Given that this proposal is dependent on budget reconciliation, it could be altered along the way. Both House and Senate developments ought to be monitored by lenders, particularly because bill could be tied to larger political struggles over government support and taxpayer expense.

Sen. Bill Cassidy, R-La., has defended the bill as a taxpayer fairness measure, saying it would stop American citizens who weren’t college educated from subsidizing college-educated people. He approximated that taxpayer savings from the bill would be $300 billion.

Critics such as Mike Pierce from the Student Borrower Protection Center argue that the bill “burdens millions of borrowers nationwide with additional student loan debt” when household budgets are being strained by inflation and economic uncertainty.

This vote is a vote to burden millions of borrowers nationwide with additional student loan debt, Pierce said in a June 11 letter to the Senate Committee.

This is both an opportunity and a warning for subprime lenders. Those that make adjustments now can gain long-term customers. Those who stretch it too thin may find themselves in the regulatory spotlight.