Can Private Markets Fill the Gap? Graduate Student Lending After the Elimination of GradPLUS

Sarah Turner

No 35683, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: The One Big Beautiful Bill Act (OBBBA, P.L. 119-21) eliminates the federal GradPLUS loan program for new borrowers effective July 1, 2026, replacing nearly two decades of uncapped federal graduate lending with annual limits of $20,500 ($50,000 for eleven professional fields) and new aggregate caps. The resulting financing gap — approximately $8 billion annually across roughly 370,000 affected borrowers — raises the question of whether and how private capital will substitute for displaced federal lending. This paper analyzes the economics of that transition. Before GradPLUS, private lenders filled the gap between federal Stafford limits and graduate program costs, with nonfederal graduate originations reaching $5.3 billion (constant 2024 dollars) by 2005–06. After GradPLUS extended federal borrowing to the full cost of attendance in 2006, private lending collapsed — falling more than 70 percent within a few years and never recovering. The federal program provided not only credit but, through income-driven repayment and Public Service Loan Forgiveness, insurance against earnings risk that no private product could replicate. The same features that crowded out private lending generated compounding distortions: borrowing untethered to repayment capacity, upward pressure on tuition, and a reversal from projected federal surpluses to losses exceeding thirty cents per GradPLUS dollar lent. Linking institution-by-field federal borrowing data to institution-by-field earnings outcomes, I examine the relationship between historical borrowing above the new OBBBA caps and post-completion earnings across programs. I find substantial variation in the extent to which different degree programs would likely support above-cap borrowing from private lenders or other sources. In fields such as law and MBA, earnings rise steeply with borrowing exposure, providing a basis for program-level risk pricing; in fields such as social work, counseling psychology, and physical therapy, the earnings-to-borrowing gradient is essentially flat. I also examine features of the private capital market and institutional responses shaping the transition — including capital constraints on scaling private lending, legal barriers to using program-level outcomes data in underwriting, and the emerging role of institutions as intermediaries between lenders and students.

JEL-codes: I22 I23 (search for similar items in EconPapers)
Date: 2026-08
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