Bonnie Latreille said the student loan repayment plan update is being treated like a one-to-one switch, but the new federal graduate borrowing cap will take effect next week and leave some students short. On July 1, limits of $20,500 or $50,000 a year begin, depending on the program.
“Congress is seeing this as a one-to-one transition, where if people can’t get guaranteed federal aid, they’re going to easily be able to tap the private student loan market,” said Latreille, co-founder of Protect Borrowers. “What we see is that, actually, when people have to rely on private student loans, they either get way more expensive loans or they can’t get loans at all.”
Grad PLUS and the July 1 cap
Grad PLUS, which Congress introduced in 2006, covered up to the full cost of attendance at any given institution. It is no more. In its place, colleges and students must work around annual federal limits, and schools will have to lower costs or help borrowers find other financing to cover the gap.
Private lenders have played a relatively small role in financing higher education over the last 20 years, but Republicans who backed loan limits and slashed federal student aid are counting on them to step in. Some colleges are already naming preferred lenders, and some are developing their own lending programs to close the gap created by the new caps.
Borrowers with weaker credit
The shift will not affect students evenly. Federal loans are largely open to borrowers regardless of credit history, while bank loans rely on strict underwriting policies to judge whether a borrower is likely to repay. Students with poor or no credit history will be shut out of the lending market.
At current tuition prices, at least a quarter of all postbaccalaureate students will need private loans or another source of money to pay for their education. Nearly four in 10 of those students have subprime credit scores below 670 or no credit history at all, and many applications will be denied unless a family member with a stronger repayment record can co-sign.
Delaware and lender options
Some states and schools are already moving. Delaware leaders have invested $800,000 in an unconventional student lending start-up, and many universities have named established companies as the preferred lenders for their students. Conservative policy experts and loan servicers argue the tighter access is intentional and say state governments, employers, and universities can help fill the gap.
For borrowers, the immediate choice is narrow: seek a private loan, ask whether a school has named a preferred lender, or find another source of funding before the cap starts on July 1. The unanswered question is how many graduate students will be unable to cover the new federal borrowing limits when they reach the market.
