The new caps on federal graduate student loans take effect July 1, limiting annual borrowing to $20,500, replacing a prior system that allowed graduate students to borrow without a per-year ceiling. The policy was authorized through last year’s One Big Beautiful Bill Act.
The limits are grounded in a four-decade-old economic theory known as the Bennett Hypothesis, named after then-Education Secretary William Bennett, who argued in a 1987 New York Times opinion piece that increases in federal student aid allow colleges to raise tuition without consequence. “The Bennett Hypothesis essentially says that, if you provide greater federal aid to schools, they will respond by increasing the price,” said Phillip Levine, a professor of economics at Wellesley College, in an interview with NPR.
Republicans are now applying the hypothesis in reverse: if unlimited loans drove prices up, capping borrowing should push prices down. “If the Bennett Hypothesis holds true, and an increase in borrowing limits increases tuition, it would logically follow that limiting the amount students can borrow would put downward pressure on tuition,” researchers at the American Action Forum wrote.
But the empirical evidence for the hypothesis is mixed, and researchers who have studied the relationship between federal lending and tuition disagree on what the caps will produce.
The Education Department, in a fact sheet, cited research finding that “unlimited federal student loans for graduate school raise tuition on a ‘dollar for dollar’ basis, with institutions capturing much of the additional funding for themselves.”
Researchers at the Federal Reserve Bank of Richmond, however, reached a different conclusion in their own work. “Following large expansions in student loan limits in 1993 and 2007, our results show further increases in loan limits would have essentially zero effect,” they wrote in an economic brief.
Researchers at the Federal Reserve Bank of New York, in a separate study, found that changes in per-student subsidized loan amounts loaded with a coefficient of 0.7 on yearly changes in maximums per qualifying student, and unsubsidized amounts at 0.6 — results suggesting some pass-through to prices, though not a full dollar-for-dollar effect.
Prism News reported that economists said colleges are “just as likely to trim aid or push students toward private debt as cut tuition” in response to the caps. The current limits on undergraduate loans are not changing, according to NPR.
The policy has drawn legal challenges. A coalition of 24 Democratic-led states and the District of Columbia filed a lawsuit in June seeking to block the caps, arguing the limits will worsen healthcare workforce shortages, particularly in rural areas. Physician assistant groups and nursing associations have also sued, with American Academy of Physician Associates President Todd Pickard warning that the $20,500 annual cap is less than half the median annual cost of a physician assistant program, which runs about $103,000 for up to 27 months of training. A federal judge has heard arguments in the case.