New limits on federal student loans are steering many borrowers toward private lenders

NEW YORK (AP) — New limits on federal student loans filled Chloe Frabotta with anxiety as she began studying in New York City to become a physician assistant.

The changes that took effect this fall include caps on loans for particular programs as well as limits on the amount parents can borrow to pay for their children’s schooling. Up until weeks before Frabotta, 25, started her program, it was up in the air whether it would count as a “professional” program with higher loan limits.

Amid the uncertainty, she borrowed around $6,000 in federal loans for her first trimester, taking 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.

Students have been turning to private lenders to make up the difference between the cost of their educational programs and the amount they can borrow from the federal government, which offers more flexible repayment terms, the possibility of forgiveness after 10 years in public service, and — for many — lower interest rates.

It's showing up in banks' bottom lines. Private lender SoFi reported in late October that 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 face federal student loan caps of $200,000, while other graduate programs are capped at $100,000. Previously, graduate students had been able to take out federal loans up to the full cost of their degree.

For new borrowers, the changes include an overall lifetime borrowing cap of $257,500 and limits to the amount parents can borrow to pay for their children’s schooling.

When all the changes are fully phased in, more than half a million borrowers are going to need to borrow an extra $20,000 a year from somewhere other than the federal loan program, estimated Jordan Matsudaira, the director of the Postsecondary Education & Economics Research Center at American University. The hardest-hit students are in expensive programs like medicine, law and dentistry and states with a high cost of living, an analysis by the center found.

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 loan caps took effect, at least 40 schools have cut the cost of at least some of their programs, according to the conservative American Enterprise Institute.

But 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.

At South Carolina Student Loan, graduate student borrowing increased 400% this year as it rolled out more options to help students. Some schools, like the law school at the University of Kansas, got into the lending game , too. So far, it has approved eight loans, with more in process.

Steven Freedman, associate dean of admissions at the University of Kansas School of Law, said the loans are important to help provide access to all students.

“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 been seeing more private student loans. Its graduate school of education and counseling also began offering a new scholarship this fall for students in financial need because of the loan caps.

Anastacia Dillon, 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.

The private loan market boomed in the 1990s and early 2000s during an era of loan limits. After Graduate PLUS, a federal program, extended how much students could borrow up to the full cost of attendance, private lending began to collapse. But critics argue that Graduate PLUS ushered in new problems, contributing to high default rates because students were borrowing more than they could repay.

Some groups predicted the new loan caps could lead to large numbers of borrowers being denied loans from traditional lenders. But students on the whole appear to be finding ways to finance their education, even if they are turning more to private lenders, said Marc Schoonover, general manager of the lender 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 during a media call organized by the National Council of Higher Education Resources.

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 . Ultimately, students pursuing graduate degrees in nursing , physical therapy and several other fields were deemed eligible to take out higher federal student loan amounts — at least for now — after a federal judge blocked part of a Trump administration rule that held them to lower limits.

But that slowed 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 changes also caused schools to delay delivering financial aid packages, Jon Witter, the CEO of Sallie Mae, said on an earnings call with investors. 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 and eligible for up to $50,000 annually in federal loans. But she decided to borrow just a fraction of that from the federal loan 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 Weill Cornell Medicine physician assistant student, said the uncertainty around 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 PA school but pivoted when the loan caps took effect.

That's 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.”

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Hollingsworth reported from Mission, Kansas.