New federal loan caps push students toward private lenders

SoFi originations nearly double as Sallie Mae graduate lending jumps 119%

The newest caps on federal student loans took effect this fall, and the students they squeeze are turning to private lenders. Private lender SoFi reported in late October that its student loan originations hit $2.9 billion in the third quarter, nearly doubling from a year earlier. Days earlier, Sallie Mae, which controls more than half of the private student loan market, said graduate loans were up 119% year-over-year.

President Donald Trump’s “Big Beautiful Bill” slashed the amount new graduate students can borrow. Programs designated as professional degrees now face federal loan caps of $200,000, while other graduate programs are capped at $100,000. Previously, graduate students could take out federal loans up to the full cost of their degree. New borrowers also face an overall lifetime borrowing cap of $257,500, and the law limits how much parents can borrow to pay for their children’s schooling.

The shift matters beyond this year’s tuition bills. Federal loans offer more flexible repayment terms, the possibility of forgiveness after 10 years in public service and, for many borrowers, lower interest rates. Matsudaira estimated that more than half a million borrowers will need to borrow an extra $20,000 a year from somewhere other than the federal loan program once the changes fully phase in. An analysis by his center found the hardest-hit students are in expensive programs such as medicine, law and dentistry, and in states with a high cost of living.

For Chloe Frabotta, 25, the caps arrived mid-enrollment. Frabotta began studying in New York City this fall to become a physician assistant, and until weeks before her program started, it remained unclear whether it would count as a “professional” program eligible for the higher loan limits. Amid the uncertainty, she borrowed about $6,000 in federal loans for her first trimester and took out private loans for the rest, with her mother as a cosigner.

“At least in my circles a lot of people were like, ‘I guess that’s what I’m going to have to do, and I’m going to try to make it work,’” Frabotta said.

The Trump administration has argued the new limits will curb “excessive borrowing” and force schools to evaluate their costs, describing uncapped access to federal student loans as a driver of the soaring cost of college. Since the caps took effect, at least 40 schools have cut the cost of at least some of their programs, according to the American Enterprise Institute. Critics say most colleges cannot afford to lower tuition and have raised concerns that the changes will add new hurdles for students from poor families in particular.

Lenders and schools are adjusting. Graduate student borrowing at South Carolina Student Loan increased 400% this year as the lender rolled out more options for students. The University of Kansas School of Law got into the lending business itself; it has approved eight loans so far, with more in process. Steven Freedman, the law school’s associate dean of admissions, said the loans are important to help provide access to all students.

“Now, frankly, private banks get to choose who goes to law school,” Freedman said.

At Lewis & Clark College, a private liberal arts school in Portland, Oregon, the student aid office has been seeing more private student loans, and its graduate school of education and counseling began offering a new scholarship this fall for students in financial need because of the loan caps. Anastacia Dillon, the college’s associate vice president for financial aid, described the changes as “really disruptive.” At the University of Mount Saint Vincent in the Bronx, more first-year students are relying on private loans even as the school boosted aid to students in financial need.

A large private loan market is not unprecedented. It boomed in the 1990s and early 2000s during an earlier era of loan limits, then began to collapse after Graduate PLUS, a federal program, extended graduate borrowing to the full cost of attendance. Critics argue the federal expansion ushered in problems of its own, contributing to high default rates because students were borrowing more than they could repay.

Some groups predicted the new caps could leave large numbers of borrowers denied loans from traditional lenders. Marc Schoonover, general manager of the lender ELFI, said students on the whole appear to be finding ways to finance their education, even as they turn more to private lenders. “What we’re hearing and seeing now is that the number of students who truly can’t find an option is a lot smaller than many initially feared,” Schoonover said during a media call organized by the National Council of Higher Education Resources.

The rollout itself was rocky. A legal fight over which graduate programs would be deemed professional — and therefore eligible for larger loans — extended until just days before the new rule was set to take effect. Students pursuing graduate degrees in nursing, physical therapy and several other fields were ultimately deemed eligible for higher federal loan amounts, at least for now, after a federal judge blocked part of a Trump administration rule that held them to lower limits.

The late resolution slowed the software updates schools need to process loans, said Kristina Ortiz Donohue, vice president for strategic enrollment and retention at the University of Mount Saint Vincent. Jon Witter, CEO of Sallie Mae, said on an earnings call with investors that the last-minute changes caused schools to delay delivering financial aid packages, and he said the peak lending season extended into October as a result. Dr. Robert Harrington, dean of Weill Cornell Medicine and provost for medical affairs of Cornell University, said the school received dozens of calls from confused students and their families.

Frabotta’s physician assistant program was ultimately deemed professional, making her eligible for up to $50,000 annually in federal loans. She decided to borrow just a fraction of that from the federal program, fearful of other changes that might be in store. Before returning to school, she earned a bachelor’s degree from Boston College and worked as a medical assistant in a dermatology practice. “This is what I want to do, so if this is the means of how I get there, then if I have to sacrifice at some point,” she said.

Madison Jessen, another first-year physician assistant student at Weill Cornell Medicine, said the uncertainty around the loan caps prompted her to use most of her savings to pay for her first semester out of pocket. Jessen said she has several younger friends who had planned to go to physician assistant school but pivoted when the caps took effect.

That prospect is Harrington’s biggest fear. “What we don’t want to see,” said Harrington, himself a first-generation college graduate, “is our programs just becoming the purview of people whose family can afford to pay that bill.”