A major unknown surrounding the changes to the federal student loan program is the larger impact of the new limits placed on graduate and parent borrowing.
Will colleges cut their prices, as the Trump administration is trying to force them to do? Will certain college programs that rely heavily on borrowing get shuttered altogether? Will some prospective students choose not to enroll because they can’t get the private loans they now need?
Any or all of these possibilities could happen, and we probably won’t get a complete accounting on any of the changes for several years.
But there’s another potential outcome that has some experts concerned. Tighter federal borrowing caps may result in more students abandoning their studies before they earn their degree.
Why Some Students May Hit a Late Funding Wall
Starting July 1, the One Big Beautiful Bill Act introduces new federal borrowing limits for parents and graduate students, each of whom previously could borrow up to the cost of attendance.
Most graduate students are now limited to $20,500 in loans annually with a $100,000 lifetime cap, while those in professional programs have higher limits of $50,000 per year and a $200,000 lifetime maximum. While undergraduate loan limits aren’t changing and haven’t for nearly two decades, the loans that parents can take out from the government are being significantly curtailed. Those parent PLUS loans will now be restricted to an annual cap of $20,000 and a lifetime maximum of $65,000 per student.
The unlimited borrowing that was previously allowed ensured students had access to the money needed to finish school, although potentially with a massive load of debt that would be hard to pay off.
But now, a different scenario could be in play.
A parent who maxes out their yearly loans will be left with just $5,000 to borrow in their student’s senior year. While some parents will make up for the difference with savings, others will hope to qualify for a private loan, which has much stricter underwriting criteria than a federal loan.
Graduate students could also fall into this trap if they aren’t thinking ahead. For example, a graduate student may cover the cost of their first year using a mix of savings and federal loans. But when Year 2 rolls around, those savings may be depleted and federal loans won’t be enough. Now this grad student also must hope to qualify with private lenders.
[Read: Best Private Student Loans.]
Studies suggest that about 40% of college borrowers wouldn’t qualify for private student loans without a cosigner, which means some students could be left unable to cross the finish line.
“I’m absolutely worried about that,” says Betsy Mayotte, president and founder of The Institute of Student Loan Advisors, a nonprofit organization that provides free student loan advice.
Mayotte counsels borrowers daily, and she says many don’t plan ahead as much as they should when it comes to their student loans.
“Students and families often say, ‘This is how much I have to borrow this year. I’ll worry about next year next year,'” says Mayotte. “You can’t do that anymore, and you couldn’t do it before. This is something that the loan limit is just going to exacerbate.”
The majority of student loan borrowers don’t borrow amounts that would exceed the new limits. About 28% of graduate student borrowers do go over the cap amounts, according to an analysis published by the Federal Reserve Bank of Philadelphia. On average, those students borrow about $21,700 above the new loan ceiling.
A study conducted by the Postsecondary Education & Economics Research Center found that only about 8% of undergraduate students in 2020 had parents who took out PLUS loans, and 29% of those parents borrowed amounts that would exceed the new caps.
Some experts believe the mid-degree dropout scenario could play out for some students, but won’t be particularly widespread. One reason is that annual graduate loan limits are the same from year to year, and the aggregate limits are high enough that a student should be able to take out consistent loan amounts each year. Experts also anticipate that schools will be proactive in preventing that situation.
“I think the colleges to some extent are going to do some counseling of the students to make sure that they are going to be able to finish,” says Mark Kantrowitz, a student loan expert and author of “How to Appeal for More College Financial Aid.”
Kantrowitz says he does foresee significant changes stemming from the lower federal borrowing ceiling.
“I expect we’re going to see a shift in enrollment patterns from higher-cost colleges to lower-cost colleges, and some students will just opt out of college altogether,” he says.
It will likely be several years before any impacts on student completion rates or enrollment patterns would be apparent, says Sarah Sattelmeyer, a project director at New America. That’s because the caps only apply to students and parents taking out new federal loans. Those already using federal loans to pay for current schooling are grandfathered in to the old regulations, allowing them to continue to borrow up to the cost of attendance for a maximum of three more years to complete their degree.
She says much will depend on how much of the loan volume private lenders will absorb.
“I think it’s certain that more people will turn to the private market, but it’s still not entirely clear what the private market options are going to look like,” says Sattelmeyer.
[Read: Best Student Loan Refinance Lenders.]
Not Finishing Is a Sign You Won’t Pay Back Loans
Failing to earn a degree after taking out loans for it can have significant financial consequences.
About six in 10 borrowers who don’t complete their degree or certificate end up defaulting on their student loans, according to an report published in 2024 by the Pew Research Center. Kantrowitz says his analysis of students in bachelor’s degree programs shows that nonfinishers are 95 times more likely to default than those who graduate.
“The No. 1 indicator that someone is going to default is that they didn’t complete,” says Mayotte.
The reason for this is relatively straightforward. A person takes out loans anticipating that the investment will pay off with a higher salary. When that doesn’t materialize, they’re left trying to pay a new monthly bill with the same paycheck as before.
“Folks take on that debt assuming that they’re going to be able to enter the career and then be able to make additional money once they get that credential,” says Kyra Taylor, a staff attorney at the National Consumer Law Center. “So if they can’t get the credential, they just have thousands of additional dollars to pay with the same resources that they had when they went into school. We certainly see many folks struggle with that.”
While students quit school for various reasons, experts say the most common cause is running out of money.
Jeannie Tarkenton, the founder and CEO of private lender Funding U, sees this occur frequently. Her company provides non-cosigner loans to undergraduate juniors and seniors who need extra money to complete their degrees. She estimates Funding U serves a market of about 2 million students who would drop out if they can’t secure loans.
She says that if those students leave school and default on their federal loans, the impact is felt beyond just that individual borrower’s credit score and bank account.
“Those are the borrowers who drag on the taxpayer system,” says Tarkenton.
[Read: Best Parent Student Loans: Parent PLUS and Private.]
How to Avoid a Surprise Funding Shortfall
The new federal loan limits will require some borrowers to map out a more thorough plan for how they’ll finance each year of college.
Mayotte says families of undergraduates should estimate the total amount they’re going to have to borrow in the first year and multiply it by five. That’s because a growing number of students now take five years to finish, and even those who complete their degree in four years may have to deal with rising costs during those years.
After that, she says you should take the full loan amount and calculate what your monthly payments may look like once you’ve graduated.
“I don’t care how financially savvy you are, for whatever reason saying I’m going to owe a hundred grand doesn’t click,” she says. “Translating that into what the monthly payment is going to be and then building it into a mock budget based on your anticipated starting salary is what clicks.”
More from U.S. News
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Why Student Loan Caps Could Lead to a Rise in Mid-Degree Dropouts originally appeared on usnews.com
