How the Education Department Processes Student Loan Applications

How the Education Department Processes Student Loan Applications
Society Guide society Informational / No affiliate links · Updated: 2026-07-22

Quick Answer

The U.S. Department of Education processes student loan applications through the Free Application for Federal Student Aid (FAFSA) system, which determines eligibility for federal loans, grants, and work-study programs.

Applications are reviewed for financial need, enrollment status, and school certification before funds are disbursed directly to educational institutions. As of July 2026, significant changes include the phase-out of the SAVE Plan due to court rulings, new repayment options like the RAP Plan, and adjusted interest rates for new loans.

Key Facts

  • Federal student loan interest rates for the 2025-26 academic year are 6.39% for undergraduate Direct Subsidized and Unsubsidized Loans, 8.07% for graduate Direct Unsubsidized Loans, and 9.07% for Direct PLUS Loans.
  • The SAVE Plan was ruled unlawful, requiring all enrolled borrowers to exit and enroll in a legal repayment plan by July 1, 2026.
  • New repayment plans, including the RAP (Repayment Assistance Plan), became available starting July 1, 2026, to replace the SAVE Plan.
  • Public Service Loan Forgiveness (PSLF) program changes scheduled for July 1, 2026, are delayed indefinitely due to a court order.
  • Defaulted loans trigger a red warning box on borrower account dashboards, and borrowers may not receive wage garnishment notices until after default occurs.
  • The Department of Education finalized a landmark rule to simplify student loan repayment and lower college costs, effective for the 2026-27 award year.

How the FAFSA Application Process Works

The federal student loan application process begins with the FAFSA, which collects financial information from students and their families to calculate the Student Aid Index (SAI). This number determines eligibility for need-based aid, including Direct Subsidized Loans, Pell Grants, and work-study programs.

The Department of Education processes millions of FAFSA submissions each year, verifying data through the IRS Data Retrieval Tool and other federal databases to ensure accuracy. Once the FAFSA is processed, the Department sends a Student Aid Report (SAR) to the applicant and a Institutional Student Information Record (ISIR) to the schools listed on the application.

Schools then use this data to create financial aid packages, which include loan offers. The process involves three key stages: application submission, data verification, and school certification.

Application Submission and Verification

Students submit the FAFSA online at StudentAid.gov, providing information about income, assets, household size, and dependency status. The Department uses automated systems to cross-check this data against tax returns and other government records.

If discrepancies arise—such as mismatched income figures or unsupported dependency claims—the application may be flagged for manual review, which can delay processing. For the 2025-26 award year, the Department introduced a streamlined FAFSA form that reduced the number of questions from over 100 to roughly 36, aiming to simplify the process.

However, technical issues during the initial rollout caused delays for many applicants. The Department has since implemented fixes, but borrowers are advised to apply early—ideally by the priority deadlines set by their schools, which often fall between February and April.

School Certification and Loan Disbursement

After receiving the ISIR, the school’s financial aid office reviews the student’s enrollment status, cost of attendance, and other eligibility criteria. The school then certifies the loan amount, which cannot exceed the student’s financial need or the school’s cost of attendance.

For Direct Subsidized Loans, the Department pays the interest while the student is enrolled at least half-time; for Unsubsidized Loans, interest accrues from the start. Loan funds are disbursed directly to the school, typically in two installments per academic year (one per semester or quarter).

The school applies the funds to tuition, fees, and room and board first, then refunds any remaining amount to the student for other educational expenses. This process ensures that loans are used for qualified education costs, as required by federal regulations.

Major Changes to Repayment Plans in 2026

The repayment landscape for federal student loans underwent significant transformation in mid-2026, driven by court rulings and new Department of Education rules. The most impactful change is the elimination of the SAVE Plan, which was ruled unlawful by federal courts following a lawsuit challenging its legality.

Borrowers enrolled in SAVE were required to switch to a legal repayment plan by July 1, 2026, or risk default.

The End of the SAVE Plan

The SAVE Plan, introduced in 2023, was designed to lower monthly payments based on income and family size, with some borrowers qualifying for $0 payments. However, a federal court determined that the Department lacked statutory authority to implement certain provisions, including the forgiveness of remaining balances after 10 years for borrowers with original loan balances below $12,000.

As a result, the Department began issuing guidance in June 2026 to all SAVE enrollees, instructing them to select a new plan. Borrowers who did not act by the July 1 deadline were automatically placed into the standard 10-year repayment plan, which may result in significantly higher monthly payments.

The Department recommends that borrowers review their options using the Loan Simulator tool at StudentAid.gov to find the most affordable plan based on their income and family size.

Introduction of the RAP Plan

The Department finalized a new repayment option called the Repayment Assistance Plan (RAP), which became available on July 1, 2026. The RAP Plan bases monthly payments on discretionary income, similar to the former SAVE Plan, but with stricter eligibility criteria and no forgiveness provisions for small loan balances.

Key features include:

  • Payments capped at 10% of discretionary income (defined as adjusted gross income minus 150% of the federal poverty guideline).
  • Loan forgiveness after 20 years for undergraduate borrowers and 25 years for graduate borrowers.
  • Interest subsidies that prevent unpaid interest from accruing beyond the monthly payment amount.

The RAP Plan is designed to be more legally defensible than SAVE, as it aligns with existing statutory language under the Higher Education Act. However, borrowers should note that these provisions could still face legal challenges.

The Department advises borrowers to read the terms carefully and consider consulting a financial aid advisor before enrolling.

Impact on Borrowers with Defaulted Loans

Borrowers whose loans are in default face additional complications. A red warning box appears on their account dashboard at StudentAid.gov, indicating that their loans are in default and that collection actions—such as wage garnishment, tax refund offset, and loss of federal benefits—may occur.

The warning message is only visible if the borrower logs into their account; otherwise, they may not receive notices about wage garnishment until after the process begins. The Department has implemented a temporary pause on most collection activities for defaulted loans through the end of 2026, but this does not apply to all cases.

Borrowers should check their account status regularly and contact the Default Resolution Group at 1-800-621-3115 for assistance. Rehabilitation programs remain available, allowing borrowers to exit default by making nine on-time monthly payments within 10 consecutive months.

Public Service Loan Forgiveness and Other Forgiveness Programs

Public Service Loan Forgiveness (PSLF) remains one of the most sought-after forgiveness programs, but its future is uncertain due to ongoing litigation. As of July 22, 2026, a court order prevents the Department from enforcing certain changes to the PSLF Program that were scheduled to take effect on July 1, 2026.

These changes would have expanded qualifying repayment plans and made it easier for borrowers to receive forgiveness after 120 qualifying payments.

Current Status of PSLF

Under the existing PSLF rules, borrowers must make 120 qualifying monthly payments while working full-time for a qualifying employer—such as a government agency, nonprofit organization, or public school—and be enrolled in an income-driven repayment plan. The Department previously implemented temporary waivers during the pandemic that allowed more borrowers to qualify, but those waivers have expired.

The delayed changes include provisions that would have allowed borrowers to count payments made under any repayment plan, including the now-defunct SAVE Plan, as qualifying for PSLF. Without these changes, borrowers who were enrolled in SAVE may need to verify whether their payments count.

The Department recommends that borrowers submit an Employment Certification Form annually to track their progress and ensure they are on the right plan.

Other Forgiveness Programs

Beyond PSLF, several other forgiveness programs exist, though eligibility requirements vary:

  • Teacher Loan Forgiveness: Available for teachers who work in low-income schools for five consecutive years, forgiving up to $17,500 in Direct Subsidized and Unsubsidized Loans.
  • Income-Driven Repayment Forgiveness: After 20 or 25 years of qualifying payments under IDR plans like PAYE, REPAYE, or the new RAP Plan, remaining balances are forgiven, though the forgiven amount may be taxable as income.
  • Total and Permanent Disability Discharge: Available to borrowers who are unable to engage in substantial gainful activity due to a physical or mental impairment, as verified by the Social Security Administration or a physician.

The Department has updated its website to include a comprehensive list of forgiveness programs and eligibility checklists. Borrowers should verify their specific situation before applying, as improper applications can delay processing or lead to denial.

Interest Rates and Cost Simplification

The Department finalized a landmark rule in 2025 to lower college costs and simplify student loan repayment, with most provisions taking effect for the 2026-27 award year. One of the most visible changes is the reduction in federal student loan interest rates for new borrowers.

Current Interest Rates

For the 2025-26 academic year, interest rates on new Direct Loans are:

  • Undergraduate Direct Subsidized and Unsubsidized Loans: 6.39%
  • Graduate Direct Unsubsidized Loans: 8.07%
  • Direct PLUS Loans (Parents and Graduate Students): 9.07%

These rates are fixed for the life of the loan and are determined annually based on the 10-year U.S. Treasury note auction in May.

Rates decreased from the previous year (6.53% for undergraduate loans) due to lower Treasury yields. The Department announced an additional rate reduction for borrowers enrolled in automatic payment plans, though specific details were not provided in the reference content.

Simplifying Repayment Options

The landmark rule also aims to reduce the number of repayment plans from the current eight to three main options: the Standard Plan, the Graduated Plan, and the new RAP Plan. This simplification is intended to help borrowers avoid confusion and choose the most appropriate plan for their financial situation.

The Department estimates that this consolidation will reduce administrative costs and improve borrower outcomes by making it easier to stay on track. Borrowers currently enrolled in older plans like PAYE, REPAYE, or IBR will not be automatically moved; they can remain in their current plans unless they choose to switch.

However, new borrowers starting loans after July 1, 2026, will only have access to the simplified set of plans. The Department advises existing borrowers to review their options and consider switching if their current plan no longer meets their needs.

Frequently Asked Questions

What should I do if I was enrolled in the SAVE Plan and missed the July 1, 2026 deadline to switch?

If you missed the deadline, the Department automatically placed you into the standard 10-year repayment plan. This typically results in higher monthly payments.

You can still enroll in an alternative plan, such as the new RAP Plan, by logging into your account at StudentAid.gov and using the Loan Simulator tool. Act quickly to avoid default and potential collection actions.

How do I check if my loans are in default?

Log into your account at StudentAid.gov. If your loans are in default, a red warning box will appear on your dashboard.

This message indicates that collection actions may occur, including wage garnishment and tax refund offset. Contact the Default Resolution Group at 1-800-621-3115 for assistance with rehabilitation or consolidation options.

Will my payments under the SAVE Plan count toward PSLF forgiveness?

The court order blocking PSLF changes means that SAVE Plan payments may not count as qualifying payments for PSLF unless you were enrolled in a PSLF-eligible plan at the time. The Department recommends submitting an Employment Certification Form to track your payments and determine whether they count.

If they do not, you may need to switch to an eligible plan and make additional payments.

Are there any new forgiveness programs available in 2026?

The RAP Plan, which became available on July 1, 2026, offers forgiveness after 20 or 25 years of qualifying payments, depending on your loan type. However, there are no new one-time forgiveness programs beyond what was previously announced.

Borrowers should be wary of scams promising immediate forgiveness; only apply through official channels at StudentAid.gov.

How are interest rates for federal student loans determined?

Interest rates are set annually based on the 10-year U.S. Treasury note auction in May, plus a fixed margin: 2.05% for undergraduate loans, 3.60% for graduate loans, and 4.60% for PLUS loans.

The rate is fixed for the life of the loan. For the 2025-26 academic year, the undergraduate rate is 6.39%, down from 6.53% the prior year.

Reference Notes

Information in this article is based on publicly available sources. Some details may change over time.

Verify with official sources before acting.

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