Assessing the REAL Reforms Act: Loan Limits

Editor’s Note: “Assessing the REAL Reforms Act” is a Minding the Campus symposium that will closely analyze the Responsible Education Assistance through Loan (REAL) Reforms Act, a bill recently introduced by Representatives Virginia Foxx (R-NC), Elise Stefanik, R-NY, and Jim Banks (R-IN). The bill “offers commonsense and fiscally responsible reforms to benefit students and borrowers in our country’s federal student loan system.”

Each article in the symposium will explore different sections of the REAL Reforms Act and will feature analysis by respected higher education experts. This piece is devoted to Section 212, a summary of which we print below, followed by analyses by researchers Lindsey Burke, Preston Cooper, and Andrew Gillen. You may read the rest of the symposium here.

Title II—Loan Reforms

Sec. 212. Loan Limits.

Grad PLUS. Eliminates the Grad PLUS program for new borrowers.

Graduate Stafford Loan Limits. Imposes limits on graduate borrowing for students enrolling on or after July 1, 2023. Graduate students are permitted to borrow $25,000 annually and no more than $100,000 in aggregate for their program.

Loan Limits Based on Institutional Discretion. Modeled after H.R. 4600, the Responsible

Borrowing Act (Rep. Grothman), allows financial aid administrators to further limit undergraduate and graduate borrowing for certain categories of borrowers, including those attending less than full-time, in order to help prevent borrowers from incurring additional unnecessary debt. Financial aid administrators are given discretion to raise limits back to the statutory cap for certain borrowers demonstrating special circumstances or exceptional need.

Lindsey Burke, Director, Center for Education Policy and Mark A. Kolokotrones Fellow in Education, Heritage Foundation

Section 212 would cap the amount of money graduate students can borrow through the Direct Loan Program and eliminate the Grad PLUS loan program entirely. It would also amend existing law to cap the annual and aggregate amounts that graduate students can borrow at $25,000 and $100,000, respectively. Currently, graduate students can borrow up to $20,500 annually in unsubsidized loans and can borrow an unlimited amount through the Grad PLUS program. Although the proposal modestly increases the annual loan cap on Direct Loans, the much more significant step of eliminating the inflationary Grad PLUS program in favor of a more modest aggregate borrowing cap of $100,000 is a long-overdue reform.

Indeed, as of 2016, more than 40 percent of federal student loan borrowers (borrowing via the Direct Loan Program) were either in default or deferment or delinquent, behind on more than $200 billion owed to taxpayers. However, the more consequential step of eliminating the PLUS Loan program would help dampen inflationary pressure on college prices. A major driver of college cost increases is the federal PLUS Loan program, which enables students to borrow up to the cost of attendance, allowing colleges to raise tuition prices profligately.

[Related: “Assessing the REAL Reforms Act: Limits on Secretarial Authority”]

As David O. Lucca, Taylor Nadauld, and Karen Shen of the Federal Reserve Bank of New York found, credit expansion (increasing subsidized federal student loans) leads to a tuition increase of 60 cents for every additional dollar of subsidized federal loans. And as the Congressional Budget Office (CBO) found, outstanding student loan debt increased sevenfold from 1995 to 2017, from $187 billion to $1.4 trillion in 2017 dollars. During that time period, annual graduate student borrowing increased by 47 percent on average, from $17,400 to $25,700. CBO also found that the PLUS Loan program is particularly costly to taxpayers, as many PLUS borrowers end up entering income-driven repayment plans upon graduating, capping the amount they repay monthly before their debt discharge is funded by taxpayers.

Section 212 also takes the important step of allowing universities to cap student borrowing. Currently, colleges are barred (apart from on a case-by-case basis) from assessing a student’s likelihood of repaying a loan and capping the amount he can borrow. Yet, giving colleges the ability to limit student borrowing—even if few colleges choose to do so—could help reduce student debt. CBO has found that borrowers tend to increase borrowing “in step with increases” in loan limits. As the National Association of Student Financial Aid Administrators has explained, schools should be able to help students borrow responsibly, ensuring they avoid delinquency and default, by being allowed to set loan limits below the federal cap and by restricting lending through school-determined criteria, such as enrollment status and chosen major. This would also help universities maintain low cohort default rates.

Preston Cooper, Senior Fellow, Foundation for Research on Equal Opportunity

Imposing borrowing limits on federal loans for graduate students is a long-overdue reform. Currently, graduate students are allowed to borrow up to the cost of attendance as defined by the institution, which effectively means they have access to an unlimited line of credit from the federal government. Schools such as Columbia University have exploited this irresponsible policy to offer fantastically expensive master’s degrees of middling quality, including a film degree that leaves students $180,000 in debt with median earnings of just $30,000.

Commonsense borrowing limits can protect students from excessive indebtedness. They can also protect taxpayers, who must frequently pick up the tab when graduate students are unable to repay their loans in full. According to the Congressional Budget Office, the Grad PLUS program—which this bill eliminates entirely—loses 14 cents for every loan dollar disbursed. Taxpayers have paid for tuition hikes at prestigious graduate schools such as Georgetown Law, since marginal dollars borrowed under the Grad PLUS program are usually not paid back. Additional borrowing is thereby costless for the student.

Limiting graduate loans will save taxpayers a bundle and will take some of the air out of a bubble in low-quality master’s degrees. But under the REAL Reforms Act, students can nonetheless borrow up to $100,000 for graduate education. This is still too high. Lawmakers could go further and eliminate federal loans for graduate education entirely, returning the graduate lending market to the private sector where it belongs.

Andrew Gillen, Senior Policy Analyst for Next Generation Texas, Texas Public Policy Foundation; Columnist, Minding the Campus

All three parts of Section 212 improve the status quo.

I’ve long advocated for holding colleges accountable for loading their students up with unaffordable debt, including in a new report. However, colleges have one big get-out-of-jail-free card to play: the government determines who can borrow and how much, and the student willingly takes on the debt, so why should the college, which had no decision over the size of the loan, be held accountable? While overemphasized (it doesn’t let colleges off the hook for knowingly setting up students for financial failure), there is a grain of truth to the inappropriateness of holding colleges accountable without giving them any say in how much students can borrow.

[Related: “The Biden Loan Forgiveness: Additional Thoughts”]

Section 212 would fix that by letting college financial aid administrators limit borrowing. If a college knows that a certain program’s students don’t earn much after graduation, it can limit their borrowing to ensure they don’t borrow too much.

Eliminating the Grad PLUS program also makes sense. Graduate students can already take out traditional loans (referred to as Stafford loans), so this program is simply redundant and lacks some of the safeguards of the traditional program.

Annual and aggregate limits on lending are also long overdue. Currently, graduate students can borrow up to $20,500 through the Stafford loan program, with a lifetime limit of $138,500 (including undergraduate loans). They can also borrow through the Grad PLUS program, and there is no annual or lifetime limit for these loans. Unlimited Grad PLUS loans are a huge problem. While many remain in denial, research on colleges exploiting financial aid by raising tuition (called the Bennett Hypothesis) consistently finds it is real. Limiting annual and lifetime borrowing is one of the few things that can somewhat tame this effect, and so it is a wise move (though I would leave the limits unchanged at $20,500 (annually) and $138,500 (lifetime, undergraduate and graduate debt combined).

Image: Vladimir Voronin, Adobe Stock


  • Lindsey Burke, Preston Cooper, and Andrew Gillen

    Lindsey Burke is the Director of the Center for Education Policy and the Mark A. Kolokotrones Fellow in Education at the Heritage Foundation. Preston Cooper is a Senior Fellow at the Foundation for Research on Equal Opportunity. Andrew Gillen is a Senior Policy Analyst at the Texas Public Policy Foundation.

2 thoughts on “Assessing the REAL Reforms Act: Loan Limits

  1. Capping the amount that one can borrow is dumb and misguided because it will be completely ineffective. You determine whether or not to loan the money just like any other loan: what is the likelihood the applicant can repay the loan? If the potential borrower is a good risk, then you determine how much to loan.

    Base the loan on the major, not on a cap. Only a fool would lend $50,000 to someone to finish a women’s studies or black studies degree. Nobody is looking for graduates majoring in critical race grievance theory. Baristas at Starbucks—the likely employment opportunity for such graduates—are not going to be able to pay back a loan of that size. Business majors and STEM majors are a different story, however.

  2. There will need to mandate reporting by both racial group & major if colleges are allowed to limit loans.

    Otherwise colleges will seek to maintain or increase numbers of students of specific races and/or majors by granting them exceptions that the majority of students don’t receive. This will lead to a much higher cohort default rate hidden in the lower rate of the much larger whole.

    And colleges absolutely will do this, especially if SCOTUS bans race-based admissions. Places like UM-Amherst already do — an audit of the parking ticket scholarship fund would be quite interesting….

    And why no limit on what colleges can charge — Medicare does that….

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