States are stepping up to create or expand graduate loan programs in a scramble to help students who face a fiscal cliff as the Trump administration prepares to limit federal loans.
With the feds set to impose caps this summer that could leave future doctors and educators without enough funding to cover college costs, state-based lenders anticipate their loans will be in greater demand.
“We’re getting calls from medical schools looking for help,” said Ray Jones, chief product officer at the South Carolina Student Loan Corp. “I’ve been in this business for 29 years, and it’s been a long, long time since I’ve seen schools actively asking our office to be a part of the solution.”
But an expansion in the market comes with its share of challenges, some of which could shut out students with the greatest need — a conundrum state lenders are trying to solve.
The need
President Donald Trump’s signature tax legislation, the One Big Beautiful Bill, eliminates Grad Plus, which lets students borrow up to the full cost of attendance. It also restricts borrowing for master’s programs to $20,500 a year and $100,000 in total, and $50,000 a year and $200,000 in total for professional degree programs. Current graduate students are exempt from the caps for three years, but those starting programs this fall will face the new limits. And the impact could be significant.
An analysis published by the Federal Reserve Bank of Philadelphia found that one-third of graduate students with federal loans have borrowed more than the new limits will allow. Students in professional programs, such as law, medicine and dentistry, are most likely to borrow in excess of the new limits.
Researchers at American University’s Postsecondary Education & Economics Research Center also found that more than a quarter, or even half, of borrowers in the top 30 master’s degree fields, including nurse administration, mental health counseling and teaching, take on more debt than the caps allow. If these trends continue, many students may be left scrambling to cover the cost of their education.
Enter state-based nonprofit lenders.
Created by states to expand college access, nonprofits have had a hand in education lending for decades and once partnered with the federal government to guarantee student loans. There are about two dozen of these lenders — some directly run by states, while others operate as quasi-governmental agencies. Many provide financial aid counseling in addition to administering loans.
Nonprofits typically raise capital through tax-exempt bond issuances and reinvest their earnings, which lets them provide lower interest rates than the federal government and many for-profit companies.
The Rhode Island Student Loan Authority (RISLA), for instance, has advertised fixed interest rates between 2.99 percent and 8.74 percent, depending on the length of repayment and a borrower’s credit. By comparison, interest rates at commercial lenders can top the high teens. Nonprofits also originate loans without a fee for the service, whereas the government charges a 4.2 percent fee for making loans through GradPlus, on top of the nearly 8 percent interest on the debt.
Most of these lenders have long provided graduate loans, but on a small scale because of the popularity of Grad Plus. The federal program only requires a basic credit check, making it more appealing and accessible than private loans. But the market is about to change.
Like his counterparts in South Carolina, Thomas Graf, executive director at the Massachusetts Educational Financing Authority (MEFA), has had an influx of calls from universities since the announcement of the new loan limits. The nonprofit has originated about $300 million in graduate student loans over the last 10 years and lends throughout the country, unlike many other state-based lenders. Colleges and universities in the state receive an estimated half a billion dollars a year in federal graduate loans.
Graf expects MEFA’s graduate lending will slowly ramp up because current students can continue to borrow from Grad Plus for three years. “With the phase in, we can meet some of the demand and gear up over time,” he said.
The challenge
The nonprofits may soon fill a need in graduate lending, but borrowers with the greatest need may also be at the greatest disadvantage.
Nonprofits don’t typically lend to people with a poor or thin credit history and usually require a co-signer — measures that make their bonds more attractive to credit rating agencies and investors.
Of the people who borrowed more than the new loan limits allow, the Federal Reserve Bank of Philadelphia found nearly four in 10 had either credit scores below 670 or no credit profile, and therefore may struggle to get a private loan without a qualified co-signer, such as a parent or spouse. Research shows, however, that it’s difficult for low-income students to obtain a co-signer who meets underwriting standards.
Rajeev Darolia, a professor of public policy and economics at the University of Kentucky, worries that nonprofits could impose double-digit interest rates on some borrowers to offset the risk, replicating practices in the broader private market to the disadvantage of vulnerable students.
State-based lenders are exploring solutions.
The Iowa Student Loan Liquidity Corp. is considering outcomes-based lending, providing loans to graduate students who don’t meet traditional credit criteria if they are in fields of study with good graduation or job placement rates, said its president and chief executive, Steven W. McCullough.
In Connecticut, the Connecticut Higher Education Supplemental Loan Authority, also known as CHESLA, is asking lawmakers to invest $10 million in a new graduate loan program to help students who may be locked out of affordable options. The state agency is putting up $20 million of its own money, and hopes that bringing the state in as a partner will afford more underwriting flexibility, said Josh Hurlock, deputy director of CHESLA.
He said area colleges have raised concerns about the federal loan limits’ impact on enrollment in social work and nursing programs. CHESLA has always offered graduate student loans through bond financing, but the partnership with the state could expand its reach.
“We’re trying to think outside the box,” Hurlock said. The proposal is making its way through the Connecticut General Assembly. “This could be a model for other states.”
Darolia, who served as chief economist at the Education Department under President Joe Biden, said finding money for states to take a more active role in education lending and getting public buy-in is going to be tough in this fiscal environment.
Jones in South Carolina agrees, but said some states may be willing to build out programs that address workforce shortages. With the support of state and private dollars, his organization offers graduate loans that can be forgiven if students work as nursing faculty in South Carolina after graduation. Vermont and other states have similar programs.
“There are some creative ways we can all try to address the need,” Jones said. “We just have to be thoughtful about the approach.”
What students should consider
Some state-based lenders have faced scrutiny in the past for aggressive collection tactics, or refusal to release parents from co-signer agreements or make modifications when borrowers faced financial hardships. Advocacy groups say those complaints have died down but still encourage students to carefully review the consumer protections state-based lenders provide.
“They need to read all the fine print,” said Betsy Mayotte, president and founder of the Institute of Student Loan Advisors. “They need to see what will happen if they become disabled. What will happen if there is a financial crisis? Are there gonna be options available to them, and not have it just pushed to the co-signer?”
She said that despite the higher interest rate and origination fees, federal loans still have some superior terms compared to private ones. The federal government is generally more generous in letting students postpone payments through forbearance and deferment than private lenders. Federal loans can also be repaid through plans that tie monthly payments to income and can be canceled under Public Service Loan Forgiveness.
Some states offer similar loan forgiveness initiatives and income-driven repayment plans, but nothing on the scale of the federal program. Several state lenders said they anticipate extending repayment periods for graduate loans to accommodate medical students, for example, who typically need more time to repay.
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