We can’t let the new US graduate borrowing caps hit social mobility

Imagine this scenario. Set on becoming a medical doctor, you spend months preparing for the standardised MCAT test. You write multiple essays. You request multiple recommendations and an interview with a few schools. A couple of thousand dollars later, you finally receive an acceptance, but the letter reveals that you will need $45,000 to cover the remaining costs after all the offered financial aid and government loans are accounted for.

So you decide to apply for a private loan. Three banks reject your application because you do not have a cosigner. Another accepts you, but you will owe thousands more because of  higher interest rates. For someone who has already defied economic odds just to make it this far, it feels like being punished backwards for trying to move forward. Still, you accept the offer and hope for the best.

For many graduate students from low-income backgrounds, such scenarios are already familiar. Only 31 per cent of loans disbursed by the private lender Ascent in 2023 and 2024 went to students without cosigners, for instance. But when the One Big Beautiful Bill Act’s federal loan caps on graduate programmes take effect in July, it will become even more common and more devastating. According to the PEER Center and the Federal Reserve Bank of Philadelphia, about 40 per cent of graduate borrowers have low or insufficient credit for a private loan, and over 28 per cent of recent graduate students borrowed beyond the new federal limits.

For professional programmes such as medicine, students will only be able to borrow up to $50,000 a year from federal loan schemes, with a $200,000 lifetime limit. For other graduate programmes, the cap will be $20,500 per year, and $100,000 over a lifetime. But these figures are far below the cost of many graduate degrees, forcing students into the private loan market and the scenario above.

But the options are increasingly limited. Rising defaults on student loan repayment have prompted many major banks to exit student lending altogether because of lower profits. This is particularly alarming when coupled with reports that federal officials are discussing the sale of portions of the federal student loan portfolio to private firms. If that happens, millions of borrowers could find themselves thrust into a system with fewer protections, higher costs and less oversight. Private lenders have a history of predatory or opaque practices, such as misleading borrowers.

One avenue of accountability should be the Consumer Financial Protection Bureau (CFPB), the agency created in 2011 to oversee the financial services industry, including student loans. However, the current federal government has minimised many of its enforcement actions. Meanwhile, staff cuts have severely limited the Federal Student Aid Ombudsman’s capacity to act as a neutral intermediary between borrowers and lenders in dispute, even as complaints have surged following the end of the pandemic-era repayment pause.

Of course, the ultimate fix isn’t better loans: it’s lower costs. Indeed, in an ideal world, the need for borrowing would be the exception, not the rule. But getting there will be very difficult. Higher education, particularly at the graduate level, has grown prohibitively expensive; the average debt for medical students now exceeds $200,000. Tuition hikes often outpace inflation, and graduate student stipends often fail to cover even basic living expenses.

At least one school (Santa Clara University School of Law) is curbing its price in response to the new loan caps, but unless many others do likewise, better debt management and ethical lending must serve as the interim path forward.

Universities’ financial aid offices should immediately move to provide more transparent information about the risks of private loans and alternatives. Students deserve to know which lenders are reputable, which offer better repayment options and interest rates, and where to turn if disputes arise.

States will also need to help fill the gap. But, so far, only 15 of them, plus the District of Columbia, have established their own ombudsman’s office – and in at least one state, offices exist but lack enforcement authority.

The National Council of State Legislatures has issued a useful brief on states that have implemented borrower regulations in the past few years. Additionally, it has released a tracker of legislation regarding student loans and lenders. Unfortunately, many such bills regarding student loan oversight have been pending or have failed.

But there have been some successes. Nevada, for example, now requires all private lenders offering student loans in the state to obtain a licence and inform borrowers of their right to file complaints. Similar measures, requiring private lenders to adhere to clear ethical standards, from transparent interest disclosures to caps on fees and penalties, have emerged in states like Illinois, Colorado and California, and model legislation exists to help those interested in following suit. But a student’s level of protection should not depend on their ZIP code. Without federal coordination or consistent standards, disparities will continue to grow.

We also need innovation from lenders. Some, such as Ascent and College Ave, are experimenting with risk-sharing models that involve schools directly. Funding U, a merit-based lender currently serving undergraduates without cosigners, is also exploring expansion into the law school markets. The effectiveness of these models is not yet entirely understood, but they show promise. Properly regulated to prevent abuse and exploitation, income-share agreements and risk-sharing models can play a role in preventing another generation of students from drowning in debt while we wait for reform that may take years to arrive.

Moreover, if a university believes you’re capable of becoming a doctor, shouldn’t the financial system recognise your future potential, too? How is it fair that your worth as a borrower is determined not by your dedication but by your credit score and your parents’ financial socioeconomic status?

The irony is staggering: society celebrates upward mobility through education, but its financial systems block precisely those who are trying hardest to achieve it. No borrower should face rejection or financial ruin simply for trying to get an education.

Josh Farris is a policy and research specialist at Leadership Brainery, a non-profit that supports college students who have limited access to master’s and doctoral degrees.