Federal loan restrictions implemented by the Trump administration July 1 mean some students now face a tuition gap
Lending experts expect a boost for the private student-loan market after new borrowing limits on federal student loans were implemented July 1.
After the federal government put new limits on certain types of student-loan borrowing this summer, lending experts expect more students to turn to private loans to help cover tuition costs.
Graduate students in particular are facing the strictest limits on federal student loans in decades. Professional students, a group that includes those pursuing degrees in medicine, dentistry or law, can borrow a maximum of $50,000 a year and a total of $200,000, according to the U.S. Department of Education. All other graduate-student borrowers face an annual limit of $20,500 and an aggregate limit of $100,000. Previously, graduate students could borrow up to the full cost of attendance as determined by the school.
These loan limits "would not come even close to covering the cost" of many high-cost graduate programs, said Sarah Austin, a policy analyst at the National Association of Student Financial Aid Administrators.
Parents are also facing a cap this year, and many are expected to turn to private loans. After previously being able to borrow up to the cost of attendance, parents can now only borrow $20,000 a year per dependent student and no more than $65,000 total per student.
Private loans can help close funding gaps, but the market can be a financial minefield for students and their families. One misunderstanding of a variable interest rate or a cosigner's responsibilities can blow up decades of financial planning.
From the archives (July 1): Student-loan borrowers face major changes that start today. Your repayment plan may be phased out.
These seven steps will guide you through the process and help you avoid unexpected costs.
1. Look into federal loans and check with your financial aid office
If you think you might need help paying for tuition, explain the situation to your university's financial-aid office. Some universities offer need-based or merit-based institutional aid, and Austin said some schools are even offering institutional loans for students who have exhausted their federal options.
NASFAA members are "exploring any and all options, knowing that there will be populations of their students that do have a funding gap now," Austin said.
From the archives (June 2025): Republicans want to curb federal student loans - and private lenders are ready to step in
Before turning to private loans, make sure you've explored all available federal loan options. To find out what you're eligible for, fill out the Free Application for Federal Student Aid, or FAFSA.
"On one hand, debt is debt. On the other hand, federal lending tends to be much more flexible than private lending in terms of repayment facilities and policies," said Josh Turnbull, senior vice president of consumer lending at TransUnion (TRU). "We haven't yet seen a lot of teeth, if you will, from the federal government in terms of taking action to affect repayment on serious delinquencies. That could be very different with a private student lender."
2. Shop around to compare lenders
Check with several lenders to compare interest rates and other loan terms. The Consumer Financial Protection Bureau recommends completing all loan applications within a two-week period to avoid any negative impact on your credit score from multiple credit applications.
"Students can shop around," Austin said. "They don't have to go with the only lender that they've heard of."
3. Understand the full impact of cosigning
Unlike federal loans, private lenders set rates based on the borrower's creditworthiness. However, roughly 40% of Americans wouldn't qualify for most private student loans based on credit-score and income requirements alone, according to an analysis from the advocacy group Protect Borrowers.
For this reason, it's common for a parent or trusted adult with better credit to cosign a student's loan. Private loans typically require a borrower or cosigner to have a credit score of at least 640, according to Bankrate, but the higher the credit score, the more likely you are to qualify for a lender's lowest rate.
It's important that the cosigner understands how the loan could affect their own credit and make it more difficult for them to get favorable terms for other loans.
"Say they're going to get a mortgage and now their debt-to-income ratio has that loan factored into it," Austin said. "That could then impact maybe on other loan products that they need to get."
4. Understand fixed versus variable interest rates
Private student loans don't always come with higher borrowing costs. "One of the things that surprises people oftentimes is sometimes the rates that you can get from private lenders are better than rates you might get through some federal programs, for a variety of reasons," Turnbull said.
Just as important as hunting for a low interest rate is understanding whether the rate is fixed or variable. A fixed rate - which federal loans have - remains consistent, meaning monthly payments will be predictable. Variable rates can fluctuate with the market and increase the total cost of paying off the loan. The latter typically only makes sense if you plan on paying off the loan within a short time frame.
5. Review repayment terms and flexibility features
Make sure you ask the lender about repayment terms so you understand when you'll start making payments and how long the loan will take to pay off. Some lenders allow borrowers to only pay monthly interest charges or a small fixed payment each month while they are still in school. Lenders may also offer the option to defer repayment until after graduation, but keep in mind that interest still accumulates during that time.
Don't be afraid to ask about other flexibility features of the loan, too. That could include discounts for setting up automatic payments, the option to temporarily pause payments during economic hardship, or a release that removes your cosigner from the loan after a certain number of consecutive on-time payments.
6. Check for fees and understand early payment implications
Private lenders can charge fees for anything from the loan's application and origination to late payments or deferment.
Lenders legally cannot penalize you for paying off your loan early, however. But there are important considerations if you want to make more than the minimum monthly payment. For example, if your monthly payment is $100 but you pay $200, the next month's bill might say "$0 due." If you take advantage of that $0 bill and skip paying the following month, daily interest will keep accumulating, wiping out the interest savings you were attempting to gain.
If you do pay extra to speed up your loan payoff, instruct your lender to apply all extra funds directly to your principal balance immediately and to keep your next payment due date unchanged.
7. Plan for financing beyond freshman year
Holding a student-loan balance increases your debt-to-income ratio, which is a comparison of how much you owe each month to how much you earn. This ratio matters if you need to apply for another loan the following school year, because lenders consider it when determining applicants' creditworthiness.
"If that original loan is now included in their debt-to-income ratio, it's possible they would not qualify the second year or the third year or the fourth year," Austin said. "You do have to reapply every year, and they're going to look at your credit again."
Now read: Here's the new way to significantly reduce the interest rate on your student loans
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