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What Higher Education Institutions Need to Know About the One Big Beautiful Bill Act

The One Big Beautiful Bill Act (OBBBA) signed into law on July 4, 2025, brings significant modifications and new considerations for higher education institutions. With changes ranging from student aid eligibility and loan programs to endowment tax and a new accountability measure, the OBBBA affects higher education finances, operations, and compliance.

Below, we highlight key provisions specific to higher education institutions. For an overview of how the OBBBA affects tax-exempt institutions more broadly, see this CapinCrouse article.

 

Federal Pell Grant Changes

The OBBBA introduces several reforms to the Pell Grant program, with implications for student eligibility, institutional planning, and workforce development, as outlined below:

• Eligibility changes – Beginning July 1, 2026, the foreign income of a dependent student’s parents and the foreign income of an independent student’s spouse, if applicable, will be included in calculating the adjusted gross income of potential Pell Grant recipients. This provision will potentially disqualify more students from Pell Grant eligibility. Additionally, beginning July 1, 2026, students with a Student Aid Index (SAI) that equals or exceeds twice the amount of the total maximum Pell Grant for that academic year will no longer qualify for a Pell Grant.
• Pell Grant ineligibility for fully funded students – Beginning July 1, 2026, students who receive grant aid from non-federal sources (including states, higher education institutions, and other private sources) that equals or exceeds the amount that it costs the student to attend the institution in which they are enrolled will not be eligible for a Pell Grant.
• Workforce Pell Grants – Beginning July 1, 2026, students working in an eligible short-term job training program (a “Workforce Pell Grant Program”) will be eligible for Pell Grant funds through a program known as Workforce Pell Grants. Students with a bachelor’s degree (but not a graduate degree) will be eligible for Workforce Pell Grant funding. In general, a Workforce Pell Grant Program must:
  • Meet certain instructional hour criteria;
  • Provide an education aligned with the requirements of high-skill, high-wage, or in- demand industry sectors or occupations;
  • Meet the hiring requirements of potential employers in those industry sectors or occupations;
  • Lead to a recognized postsecondary credential; and
  • Prepare students to pursue one or more certificate or degree programs at one or more institutions of higher education.

Before this change, Pell Grant funds could only be used for programs where the student worked at least 600 hours and the program was 15 weeks or longer. Workforce Pell Grants will allow funds for programs that are between 150 and 599 hours and run eight to 15 weeks, significantly expanding the types of programs that may be eligible for Pell Grant funds.

Note that while noncredit programs are currently excluded, the Department of Education may create an equivalency pathway for noncredit programs to become eligible.

• Funding to address the projected Pell Grant shortfall – The OBBBA provides a one-time $12.67 billion funding boost to help offset the predicted Pell Grant shortfall.

 

Other Federal Loan Program Revisions

Effective July 1, 2026, the OBBBA introduces new borrowing limits for students and parents:

• Student loan amounts proportional to enrollment status – Students enrolled less than full-time will have their borrowing limits reduced proportionally based on the number of credit hours they are enrolled in.
• Parent borrower limits enacted – The annual limit for Parent PLUS loans will be $20,000 per student, while the aggregate limit will be $65,000 per student. Currently, eligible parents can borrow up to the cost of attendance at the institution their child attends, minus any other financial assistance their child receives.
• Changes for graduate and professional students – Federal Direct PLUS loans will no longer be available to graduate and professional students. For unsubsidized loan programs, the maximum annual amount that may be loaned to students will be:
  • Graduate students: $20,500 (aggregate: $100,000)
  • Professional students: $50,000 (aggregate: $200,000)
• New lifetime loan maximum introduced – The lifetime maximum loan amount for all students will be $257,500. This maximum does not apply to Federal Direct PLUS loans and does not include loans made to a parent borrower.

 

529 Plan and Education Tax Credit Changes

The OBBBA made several changes to allowable 529 plan expenses:

• Expanded definition of qualified education expenses – In addition to tuition and related fees, the definition of qualified education expenses for the purposes of K-12 education now includes books, materials, testing fees, enrollment fees, educational therapy, and tutoring costs. Some of these expenses, such as educational therapy, have more nuanced definitions, so it will be important to examine those definitions if a taxpayer wants to use 529 funds for those purposes. This expanded definition applies to any expense paid after July 4, 2025.
• Limit for total K-12 expenses doubled – Effective January 1, 2026, the limit for total K-12 expenses from a 529 account will increase from $10,000 to $20,000 per year.
• Additional uses for 529 funds – Effective July 4, 2025, 529 funds may be used for:
  • Qualified postsecondary credentialing expenses, if the beneficiary is enrolled in a recognized postsecondary credential program
  • Fees for testing, if the testing is required to obtain or maintain a recognized postsecondary credential
  • Fees for continuing education, if the education is required to maintain a recognized postsecondary credential

In addition, effective January 1, 2026, individuals must have a Social Security number to be eligible for the American Opportunity Tax Credit and the Lifetime Learning Credit under IRC 25A.

 

Changes to the Excise Tax on Endowment Income

The OBBBA increases the amount of tax that will be levied on institutions with endowments that exceed a certain size. Beginning in 2026, the endowment tax will apply to schools with 3,000 or more students, half or more of whom must be located in the United States. Note that the “religious institutions” exemption in the House version of the OBBBA was removed from the final version signed into law.

Importantly, the OBBBA includes amounts that were previously excluded from the definition of net investment income, such as student loan interest and royalties derived from intellectual property developed using federal funds.

The amount of the “student-adjusted endowment” will now be calculated by dividing the total value of the endowment assets (which excludes assets used directly for educational purposes) by the number of eligible students.

The tax rates that will be levied against institutions’ net investment income are as follows:

Student-Adjusted Endowment	Rate
Between $500,000 and $750,000	1.4%
Between $750,000 and $2 million	4%
Above $2 million	8%

 

New Accountability Measure

The House had passed a version of the OBBBA that included a controversial measure known as “risk-sharing,” which would have required higher education institutions to pay a certain amount if students failed to make student loan payments. This was viewed as an accountability measure by its proponents.

In the final version of the OBBBA, the risk-sharing provision was replaced by an accountability measure related to the earnings of students who complete a degree program. For undergraduate degree programs, institutions will need to demonstrate that the median earnings of graduates four years after graduation exceeds the median earnings of individuals residing in their state who are aged 25 to 34, are not enrolled in an institution of higher education, and hold a high school diploma or its equivalent. For graduate programs, institutions will need to demonstrate that the median earnings of graduates four years after graduation exceeds the median earnings of individuals residing in their state who are aged 25 to 34, are not enrolled in an institution of higher education, and hold a bachelor’s degree.

If an institution fails this test in two out of three consecutive years for a given educational program, it will lose its eligibility for federal student loans for student enrollment in that program. These changes are effective beginning July 1, 2026.

 

Taking a Strategic Approach

The OBBBA represents one of the most consequential changes in federal tax and education policy in recent years. Higher education leaders should approach the changes proactively and strategically to assess the financial impacts, update their compliance protocols, and modify their planning to remain both compliant and competitive in a rapidly evolving landscape.

Please contact us if you have any questions about these changes and how they may apply to your institution.

 

Additional Resources:

What Nonprofits Need to Know About the One Big Beautiful Bill Act

Key Changes in the One Big Beautiful Bill Act – This helpful chart from Carr, Riggs & Ingram highlights the key changes for individuals, businesses, and estates

Treasury and IRS Announce 2025 Penalty Relief for Employer Reporting of Overtime Pay and Tips

Section 127 Plans Permanently Expanded to Include Student Loan Repayment

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