Tighter federal student loan caps are pushing more borrowers to private lenders

NEW YORK (AP) - Stricter federal student loan limits have left Chloe Frabotta anxious as she began training in New York City to become a physician assistant.

The new rules, which began taking effect this fall, place caps on borrowing for certain programs and also restrict how much parents can take out for their children's education. In the weeks before Frabotta, 25, started classes, it was still unclear whether her program would be classified as a "professional" program eligible for higher borrowing limits.

Faced with that uncertainty, she took out about $6,000 in federal loans for her first trimester and covered the rest with private loans, using 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.

Many students are now turning to private lenders to bridge the gap between the cost of their programs and the amount available from the federal government, which typically offers more flexible repayment options, possible loan forgiveness after 10 years in public service and, for many borrowers, lower interest rates.

The shift is already showing up in lenders' results. SoFi said late last month that student loan originations reached $2.9 billion in the third quarter, nearly twice the figure from a year earlier. Sallie Mae, which holds more than half of the private student loan market, said graduate loans were up 119% from the same period a year earlier.

President Donald Trump's "Big Beautiful Bill" reduced how much new graduate students may borrow. Graduate programs classified as professional degrees now have federal loan caps of $200,000, while other graduate programs are limited to $100,000. Before the change, graduate students could borrow federal loans up to the full cost of attendance.

For new borrowers, the overhaul also imposes a lifetime borrowing cap of $257,500 and limits the amount parents can borrow for their children's schooling.

When the changes are fully phased in, more than half a million borrowers will need to find an extra $20,000 a year outside the federal loan system, according to Jordan Matsudaira, director of the Postsecondary Education & Economics Research Center at American University. The center found that the students likely to be hit hardest are those in high-cost fields such as medicine, law and dentistry, along with students in states where living expenses are especially high.

The Trump administration says the new limits are meant to curb "excessive borrowing" and push colleges to reconsider pricing, arguing that unrestricted access to federal student loans helped drive tuition higher. Since the caps took effect, at least 40 schools have lowered the price of at least some programs, according to the conservative American Enterprise Institute.

Critics counter that most colleges cannot simply cut tuition and warn that the changes will create new barriers, especially for students from low-income families.

South Carolina Student Loan said graduate student borrowing rose 400% this year as it introduced more options to help students. Some schools have also moved into lending themselves, including the University of Kansas law school, which has approved eight loans so far and has more under review.

Steven Freedman, associate dean of admissions at the University of Kansas School of Law, said the loans matter because they help keep access open to students from all backgrounds.

"Now, frankly, private banks get to choose who goes to law school," he said.

At Lewis & Clark College, a private liberal arts school in Portland, Oregon, the student aid office has seen more private student loans. Its graduate school of education and counseling also launched a new scholarship this fall for financially needy students affected by the caps.

Anastacia Dillon, associate vice president for financial aid, called the changes "really disruptive."

At the University of Mount Saint Vincent in the Bronx, more first-year students are leaning on private loans even as the school has increased aid for those with financial need.

The private student loan market expanded in the 1990s and early 2000s, when borrowing limits were tighter. After Graduate PLUS, a federal program that allowed students to borrow up to the full cost of attendance, private lending declined sharply. Critics, however, say Graduate PLUS helped fuel new problems by encouraging students to borrow more than they could repay, contributing to high default rates.

Some groups warned that the new caps could leave many borrowers unable to secure loans from traditional lenders. Still, students overall appear to be finding ways to finance their education, even if more of them are turning to private lenders, said Marc Schoonover, general manager of ELFI.

"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 on a media call organized by the National Council of Higher Education Resources.

A legal dispute over which graduate programs should count as professional - and therefore qualify for larger loans - continued until just days before the rule was set to start. In the end, students in nursing, physical therapy and several other fields were allowed to borrow higher federal amounts, at least for now, after a federal judge blocked part of a Trump administration rule that would have subjected them to lower limits.

That late change slowed the software updates needed to process loans, said Kristina Ortiz Donohue, vice president for strategic enrollment and retention at the University of Mount Saint Vincent.

The last-minute revisions also caused schools to delay financial aid offers, Sallie Mae CEO Jon Witter said on an earnings call. As a result, he said, the busiest lending season stretched into October.

Dr. Robert Harrington, dean of Weill Cornell Medicine and provost for medical affairs at Cornell University, said the school received dozens of calls from confused students and family members.

Frabotta's physician assistant program was eventually classified as professional and became eligible for up to $50,000 a year in federal loans. Even so, she chose to borrow only a small portion of that amount through the federal program, worried that further changes could still come.

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 uncertainty over the caps led her to use most of her savings to pay for her first semester. She added that several younger friends who had planned to attend PA school changed course after the limits were announced.

That is Harrington's biggest concern.

"What we don't want to see," said Harrington, who is himself a first-generation college graduate, "is our programs just becoming the purview of people whose family can afford to pay that bill."

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Hollingsworth reported from Mission, Kansas.