New Rules Could Push Grad Students Into Private Student Debt

The landscape of student loans is set to change drastically in the coming years, as new limits on federal student loans are poised to push graduate students towards private lenders for their education funding. President Donald Trump’s domestic policy plan, set to take effect in 2026, will cap the amount of money graduate students can borrow from the federal government at $20,500 per academic year for master’s programs. This marks a significant departure from the current policy, which essentially allows for unlimited borrowing.

With master’s degree programs typically lasting two years, students in these programs will effectively be cut off from federal loans at $41,000. This new limit poses a challenge for many borrowers, as data from 2020 shows that the average amount borrowed for master’s programs was nearly $54,000, excluding debt from undergraduate studies. To bridge this funding gap, many grad students may have no choice but to turn to private student lenders.

Private student loans often come with stricter lending terms, higher interest rates, and fewer benefits compared to federal loans. While federal graduate student loans currently have interest rates between 8% and 9% and lenient credit requirements, private lenders may charge interest rates as high as 15% for borrowers or cosigners with stellar credit. This shift towards private loans could have significant financial implications for graduate students seeking higher education.

In recent years, only a small percentage of graduate students have borrowed from private lenders for their education expenses. However, with the new federal loan limits set to come into effect, this number is expected to increase dramatically. Trump’s budget package maintains the $20,500 limit for unsubsidized Direct loans for master’s programs while eliminating the Graduate PLUS loan program, which currently does not have explicit loan limits.

Based on analysis from economist Jordan Matsudaira, over half of master’s degree borrowers would exceed the new lending limits, potentially pushing them towards private student loans. This shift underscores the growing importance of private lenders in the higher education financing landscape and highlights the challenges that graduate students may face in funding their education in the future. The recent changes to federal lending limits for graduate student loans have sparked a discussion about the potential impact on borrowers and their options for financing their education. While some may see the new limits as a way to encourage responsible borrowing and reduce reliance on federal loans, there are some caveats to consider.

Adam Looney, an economics fellow at Brookings and finance professor at the University of Utah, offers a different perspective on the situation. He notes that just because a borrower exceeds the new funding threshold doesn’t necessarily mean they will automatically turn to private student loans. Many borrowers who find themselves approaching the limit may choose to borrow less or explore other ways to finance their education, especially for smaller amounts.

To better understand the potential impact of the new lending limits, Money separated borrowers into groups based on how much they borrowed. The analysis revealed that approximately 49% of federal borrowers in master’s programs are likely to stay within the new limits. However, over 44% are at medium to very high risk of needing private student loans, while only 7.4% may be able to avoid them through frugality or alternative payment strategies.

One significant concern is the impact of inflation on these borrowing limits. Using data on graduate program tuition growth rates dating back to 1990, Money projects that the average cost of a master’s degree will increase to about $50,400 by 2026. This increase in tuition costs means that many students may find themselves exceeding the new borrowing cap, particularly when additional expenses like housing are factored in.

To account for the impact of inflation, Money adjusted the $41,000 borrowing threshold for 2026 using cumulative annual growth rates of tuition over the past 30 years. This adjustment revealed that borrowing $41,000 in 2026 would be equivalent to borrowing about $30,100 in 2020, highlighting the potential financial strain that some students may face in the coming years.

While the new federal lending limits aim to promote responsible borrowing and reduce reliance on federal loans, the reality is that many graduate students may still find themselves in need of additional funding to cover the rising costs of education. As students navigate these changes, it will be crucial for them to carefully consider their financial options and make informed decisions about how to finance their graduate studies.