Dive Brief:

• About 28% of graduate borrowers in recent years have borrowed above new federal student loan limits set to go into effect in July, according to a recent analysis by the Federal Reserve Bank of Philadelphia’s Consumer Finance Institute. 
• Of those graduate students, nearly 40% would potentially fail to secure private loans without a cosigner under existing underwriting standards because of their credit profiles, the study found. 
• The forthcoming limits were created by Republicans' big tax and spending bill enacted this past summer. Starting in July, that legislation will also sunset the Grad PLUS loan program that has allowed graduate students to borrow up to the cost of their attendance.

Dive Insight:

Researchers with the Consumer Finance Institute set out to provide answers to one of the biggest questions hanging over one of the biggest changes to the federal student aid system of the past two decades: To what extent will private lending fill the gap after Grad PLUS ends and new borrowing limits kick in?

Specifically, the limits cap total student borrowing at $100,000 for graduate students and $200,000 for professional students — a term that regulators are still defining to carry out the statute. Annually, federal lending will max out at $20,500 for graduate students and $50,000 for professional students.

“All else equal, the effects of these new caps depend importantly on the extent to which the private sector is willing and able to fill in the gap left by the withdrawal of the U.S. Department of Education as the main financier of graduate education,” the Consumer Finance Institute authors — Tomas Monarrez, Jordan Matsudaira and Dubravka Ritter — said in their analysis. 

To address the question of private lending, the researchers used a blind match of National Student Clearinghouse program enrollment records with data from credit-tracking firms. They focused on a subset of about 66,000 graduate students who first enrolled in graduate programs between 2015 and 2024. 

Nearly one in three borrowers surpassed the cap, though researchers found a lot of variance among institutions and program types. For instance, 53% of doctoral students at private nonprofit institutions borrowed above the caps, compared to 13% of master’s students at for-profit colleges. 

The field matters as well. Across all programs, doctoral students in the health professions had the highest rate of borrowing over the loan caps, at 61%. 

Some health profession programs — including nursing, occupational therapy and physician associate programs — could be excluded from the larger “professional” degree caps based on regulatory language the Education Department plans to propose. 

Overall, of the 28% of borrowers who surpassed the coming caps, 38% had either subprime credit scores or no score at all, meaning they would struggle to borrow in the private sector without a co-signer — which they wouldn’t necessarily need for Grad PLUS loans. 

As other researchers have noted, the Grad PLUS program has largely replaced a portion of private sector student lending for graduate school — which could explain why Grad PLUS loans had no significant effect on enrollment over its lifetime, according to a 2023 working paper published by the National Bureau of Economic Research. 

But, as that paper’s authors pointed out, much has changed in the private student lending market since Grad PLUS launched in 2006, including the financial crisis of the late aughts that led to tightened lending standards in many sectors. 

Private lenders today play a “minimal” role in financing grad school, the Consumer Finance Institute authors noted, also writing that, “It is unclear the extent to which they will be willing to extend credit to graduate students affected by the loan caps.” 

Moreover, students with lower credit scores could see higher interest rates and less generous terms compared to federal student loans, which also come with protections for financially challenged borrowers, the authors noted.