What Do OBBBA’s Tighter Borrowing Limits Mean for Students?

The One Big Beautiful Bill Act (OBBBA) introduced sweeping reforms to the federal student loan system. Aimed at reducing the cost of the loan system, the legislation imposes strict new borrowing limits. These changes will undoubtedly trigger a substantial shift in student borrowing to the private lending market, with significant consequences for students, families, and institutions.

Some students may forgo educational opportunities because they can’t qualify for a loan, while others will likely face private loan options that are unaffordable or, worse, predatory. While Congress is shrinking the federal loan footprint, it must also ensure that the private market steps up responsibly with more accessible and affordable financing options.

Prior to OBBBA, the Parent PLUS and Grad PLUS programs allowed students to borrow up to the cost of attendance for undergraduate (if their parents cosigned) and graduate programs.

OBBBA changes that. For students starting in the 2026-27 academic year, Parent PLUS loans for undergrad and grad students are capped at $20,000/$65,000 (annual/aggregate), graduate loans are capped at $20,500/$100,000 for graduate programs and $50,000/$200,000 for professional programs (medical, pharmacy, and law, for example). Grad PLUS is eliminated, and students face a $257,000 lifetime cap across all undergraduate and graduate borrowing. Part-time students will also no longer be able to borrow up to the full annual limit. For example, a half-time first-year undergraduate dependent student would now be subject to an annual $2,750 limit on federal Direct Loans rather than the pre-OBBBA $5,500 limit. 

In addition to these statutory loan limits, institutions will now have the power to set even lower limits for their students on a program-by-program basis. This means that a college or university could subject students enrolled in specific fields of study to borrowing limits even lower than those in the statute, though Pell Grants and other forms of federal aid would be unaffected. 

How big are the financing gaps created by OBBBA?

Undergraduates: Only 3% of borrowers (roughly 58,000 students) in the 2019-20 undergraduate class exceeded $65,000 in Parent PLUS loans. The new Parent PLUS cap under OBBBA would represent a disappearance of $2.2 billion in Parent PLUS lending, or just over 4% of the total amount of federal borrowing for undergraduate education. This reduction in federal lending would likely disproportionately affect students enrolled in high-tuition private schools.

Graduate Students: A much larger share of graduate students will face financing gaps. Roughly 38% of the graduate borrowers in the 2019-20 graduating class borrowed above the new graduate loan caps. These caps, if implemented in the 2019-20 school year, would have reduced the federal loans available to them by $9.7 billion, representing a 28% reduction.

How will students be affected by the borrowing limits?

Many students, particularly those without generational wealth, will rely on private loans to fill the gaps. But the vast majority of private market lenders are ill-equipped to serve them. Even students in programs with strong earnings outcomes may still be denied private loans if they have poor credit histories or lack cosigners.^[1] And the available private loans are largely fixed-payment loans that lack income-based protections, and most will entail high interest rates—posing serious affordability challenges, especially for low-wage borrowers.

As a result, many undergrads from middle- and lower-income backgrounds could be priced out of private institutions or out-of-state public institutions. Others may be priced out of high-cost, high-return graduate degrees in fields like business, law, and medicine. Students burdened with these new private loans will likely face steeper monthly payments for years, limiting their financial flexibility and delaying their path to economic success and mobility.

Part-time students may be especially impacted, because their borrowing limits will now be prorated on the basis of enrollment intensity. This potentially significant reduction in borrowing limits will make it harder for part-time students to balance work and school, and may disproportionately limit access to education for working learners.

Outcomes-based financing: A better private option

Unlike a traditional private loan, outcomes-based financing (OBF) models tie the amount that borrowers pay to what they earn, echoing the low-wage protections in the federal loan program. These OBF options, which can be structured either as loans or income share agreements, can provide these advantages:

Affordability: Under an OBF, students are only required to make payments if their income reaches a certain threshold, and those payments can be calibrated to be affordable relative to earnings. OBFs are not inherently affordable—like any loan or other form of financing, they must be carefully designed to avoid predatory terms. However, when thoughtfully structured, a well-designed OBF will be far more affordable than a well-designed fixed-payment loan.

Accessibility: OBFs can expand access to financing for students who might be excluded from traditional fixed-payment loans for two key reasons. First, OBF lenders typically don’t base eligibility on credit scores or employment histories; instead, they look at the expected outcomes, such as graduation rates, job placement, and earnings from the student’s educational program. By focusing on a student’s future potential rather than their financial past, OBFs can serve students who lack strong credit histories or cosigners, as long as those students are enrolled in programs that will lead to well-paying careers.

Second, traditional lenders are more sensitive to default rates because they only have a single, blunt tool—higher interest rates—to compensate for their losses on the defaulted loans. Yet charging higher interest rates can, in turn, make the loans unaffordable for the rest of the borrowers. OBFs, by contrast, recoup their default losses by asking more from higher-earning borrowers who are able to make payments. This risk-sharing model enables lenders to offer more inclusive, flexible financing while protecting low-earning graduates from unmanageable repayment burdens.

^[1] Most federal loans require neither a credit check nor a cosigner: Only Parent PLUS and Grad PLUS loans check credit (and only for adverse credit events like bankruptcy), and only Parent PLUS loans require a cosigner. In contrast, nearly all private loans require a full credit report and sufficient credit score, and most (95% of private undergraduate loans and 72% of private graduate loans) have a cosigner. https://www.enterval.com/#reports