The new Administration and House have proposed New Federal Student Loan Limits, specifically for the Parent and Grad PLUS programs. It will change how students, parents, and colleges make their higher education decisions for undergraduate and post-graduate studies. The prior administrations had identified issues with student loan debt and the current administration now needs to address this problem.
Under the current laws, students have limits on the amount of Direct Federal Loans, also called Direct Stafford Loans. These limits are very low considering the cost of college. Traditional dependent undergraduate students are limited to only $27,000 over the first four years. Those loan limits have not changed since 2007 and 2008. Considering today’s college prices, that multi-year limit will not cover the first year.
As a result, many parents pay for additional college expenses with their savings or borrow money. The Federal Parent PLUS Loan is the loan most used. According to the Department of Education Data, Parent PLUS debt is up over 83% since 2014. Grad PLUS loans increased by over 200% in the same period.
Understanding Current Rules
Under the current federal loan process, Parent PLUS and Grad PLUS loans have a cap up to the cost of the college or Cost of Attendance (COA) less any financial aid the student receives. It is basically unlimited.
The federal loan approval process is minimal. The loan will be approved as long as the borrower’s credit score is above 63o and they have no recorded payment defaults over the past 90 days. The interest rate is determined annually for all borrowers from July 1st to June 30th.
The federal loan approval process is unlike any other loan approval process. Most loans require a formal underwriting process to access the funds. The lender needs to measure the risk of default before approval. Many loans often have a physical asset that can be reclaimed if the borrower defaults. A student loan has no asset value to reclaim.
Some believe that this PLUS loan policy has contributed to the college cost inflation since the colleges have minimal consequences for the borrowers’ loan default.
Reasons for New Federal Loan Limits
Due to COVID and other repayment programs, many borrowers have not needed to make student loan repayments for the past five years. The new administration has recently announced that collections and garnishments are restarting in May. This enforcement will impact delinquent borrowers and their credit scores.
We are starting to see the consequences of the unlimited borrowing policy. The college funding decision is often the most significant purchase parents make before retirement, and families typically make it on their own. According to a recent report from the Consumer Financial Protection Bureau (CFPB), social security benefit garnishments are up over 3000% since 2001. The DOE estimates that over 452,000 borrowers over 62 will default on their federal student loans now that repayment is restarting.
Due to these outcomes, the federal government will need to do something in the future, which is why the proposed limits exist. Based on a CATO report, the federal government will lose $0.19 per dollar lent. No business would be viable if that were its business model. The federal government understands the importance of education and needs to subsidize it to an extent. However, they realize that these growing losses will put other government programs at risk if they do not change.
Proposed Federal Student Loan Limits
The House and the Senate have different student loan limit proposals, but lifetime limits are almost the same. The method of how the limits will be allocated is still unknown, and that could be a significant factor.
Under the current PLUS loan process, you could borrow as needed, so there was no formal annual limit. One of the proposals will place an annual limit similar to the student’s current process.
If that were the case and they used the student’s current annual limits, the parents over the first four years could also be $27,000. The current student limits are $5,500, $6,500, $7,500, and $7,500 for each of the first four years. These limits could be lower since they are determined by the Student’s Academic Progress or SAP. The SAP measures your completion level toward the student’s degree. For example, if students drop a course, they will not get the full annual limit the following year.
It is also unclear whether the lifetime limit is per parent or per child of the parents. The current limits are $50,000 to $65,000 for parents. The graduate and professional school limits are $100,000 to $150,000 for that portion of the education.
Increase Need for Private or Alternative Loan Planning
We need to assume that loan limits are coming. It is just a matter of time. This information and understanding the age of your college and college-bound children will be critical. Under the current rules and the easy access to funding, college affordability was not a concern for many families. Students and parents could build their list or commit to a college with limited risk of not getting the funding. Under the new rules, a college funding plan to graduation is recommended at the list-building stage and commitment to the college.
These new federal loan limits will also complicate the college decision process. Our consulting services explain the difference between the federal PLUS programs and alternatives such as a private student loan or home equity. Often, parents selected the Parent PLUS Loan for a variety of reasons. The primary reasons included repayment flexibility, no underwriting, possible loan forgiveness, and a death and disability benefit.
These federal loan benefits are not going away. At today’s college costs, federal loans will not be able to fund the total cost fully, so families will need to consider alternative options to complete their funding.
Considering the new borrowing model, college graduates will have three or more loan types with different interest rates, repayment terms, and methods. If the family needs to borrow money, the college student will likely have their federal loans, some parents’ federal loans, and an alternative student loan, such as a private student loan. In addition, families will need to complete the FAFSA to get access to the federal loan and have some loan underwriting done each year to get the alternative loan approval.
Impact on the College’s Admissions Due to the New Limits
As stated above, colleges have minimal exposure to student loan default rates. Under the new proposal, there will be more accountability. The proposal contains both an incentive benefit and a default rate penalty. Could this change the admission models for many colleges? Will the applicant and their parents be reviewed with their ability to pay as a higher factor due to the new rules? Only time will tell.
The current college financial information model is highly related to the SAP rules. That is why colleges only provide financial information one year at a time. With these new rules, colleges must consider the student’s ability to fund the entire education.
Imagine a good-graded student completes their second or third year, and the family cannot get approved for an alternative loan to complete the remaining time. The student will need to transfer or not return. Inability to pay could be a new problem for more colleges, which may change admission and financial aid.
Timing of Implementation for New Federal Loan Limits
Many moving pieces still need to be resolved, and I am not a constitutional expert. Based on various reports, implementation of the limits will start in the school year 2026-27, or 7/1/2026.
A three-year runway is in the proposal for current enrolled college students graduating before 7/1/2028. It is a transition period into the new limits since these rules did not exist when their college decision was made. This year’s entering college student have some risk since their college senior year will have limits in place.
For current high school parents, especially rising seniors, you need to plan for the federal loan limits to be in place. Funding this expense will impact your list-building process. You should have a few colleges where the loan limits will have a minimal impact on your child’s graduation from that college.
PayForEd advisors can help you navigate these changes since we have college financial aid and student loan repayment expertise.
Summary of Federal Student Loan Limits
The proposed federal loan limits will significantly change the college admission and funding process. For example, affordability will become a bigger factor in the decision-making process. It will impact both the families and colleges.
At today’s current college cost, it is like buying a house. Under the current model, affordability was not a significant risk due to the lack of loan limits and underwriting. Under the new method, it is more like a mortgage. You may have the down payment but can’t afford the taxes and utility bills to live there. Getting the formal underwriting approved may be difficult, but you will not know until a few years later. Unlike any other major purchase, most families are on their own when making this decision since the borrowing is done year by year.
The PayForEd college funding strategies can help you identify this risk and help families avert a problem in the future.
