U.S. Education Department Rule Caps Graduate Student Loans and Simplifies Repayment

The U.S. Department of Education has proposed rules to cap graduate student borrowing and simplify federal loan repayment, affecting colleges, graduate students, and loan servicers in 2026. 

The U.S. Department of Education has issued a Notice of Proposed Rulemaking to implement recent changes to federal student loans.
The proposal follows statutory amendments tied to the Working Families Tax Cuts Act.

It would cap graduate and professional borrowing, eliminate Grad PLUS loans, and reduce repayment plan options.The rule matters now because it sets borrowing limits for students entering programs in mid-2026 and reshapes repayment administration across the federal system.

Education Department Proposes Graduate Loan Caps

The proposed rule would eliminate the Grad PLUS program, which has allowed graduate and professional students to borrow up to the full cost of attendance set by their institution.

In its place, the Department would apply statutory annual and lifetime borrowing caps that materially reduce how much students can access through federal loans.

From July 2026, new graduate students would be limited to $20,500 per year, with a total borrowing cap of $100,000.

New professional students would face higher limits — $50,000 annually and $200,000 over a lifetime — but still well below the open-ended borrowing previously available under Grad PLUS.

The rule would also permit colleges to impose program-level loan caps below the federal maximums, giving institutions discretion to restrict borrowing further.

Compliance would be enforced through existing Title IV oversight mechanisms, including routine audits and program reviews.

Why the Rule Was Introduced and How It Fits Into Federal Law

Federal data have shown that graduate student borrowing has increased faster than undergraduate borrowing for more than a decade.

The availability of unlimited Grad PLUS loans has been linked to higher tuition pricing in certain graduate and professional programs.
Lawmakers have also pointed to rising default exposure and growing balances in income-driven repayment plans as evidence of long-term risk to both borrowers and taxpayers.

The rule operates within Title IV of the Higher Education Act, which governs federal student lending.
Congress sets borrowing authority through statute, while the U.S. Department of Education implements those limits through negotiated rulemaking and regulation.

Once finalized, the rule would carry the same legal force as existing Title IV regulations, requiring institutional compliance to maintain federal aid eligibility.

Courts reviewing challenges typically examine statutory authority, procedural compliance, and whether the regulation is reasonable under established administrative law standards.

Practical Impact on Institutions and Borrowers

Colleges and universities would be required to restructure graduate financial aid packaging to comply with new statutory borrowing caps, which may force changes to tuition pricing, institutional aid, or internal financing models.

Loan servicers would also need to update repayment systems as legacy plans are phased out, alongside revised borrower disclosures, staff training, and default rehabilitation procedures to meet Title IV compliance requirements.

For students, the rule would introduce defined federal borrowing limits before enrollment and reduce repayment options to a tiered standard plan or a single income-driven plan, simplifying choice while limiting flexibility.

Borrowers in default would gain a second statutory opportunity for loan rehabilitation, allowing loans to return to good standing and removing default-related penalties upon successful completion.

Key Questions Raised by the Proposal

The most immediate change is how borrowing limits are set. Graduate and professional students would no longer be able to borrow based on tuition or cost of attendance.

Instead, borrowing would be capped by statute, meaning many students may need to seek private financing or institutional aid to cover remaining costs.

The rule would apply to any institution participating in federal Title IV aid programs. Compliance is not optional. Schools that fail to adhere to the new limits would risk enforcement action through program reviews and, in serious cases, loss of federal funding eligibility.

The caps would apply only to new borrowers beginning in July 2026. Existing federal loans would remain governed by prior rules, and current balances would not be retroactively adjusted.

Institutions would also be permitted to impose stricter program-level borrowing caps below the federal maximums.

This discretion could be exercised using earnings data, default rates, or internal risk assessments, shifting more responsibility to colleges to police borrowing outcomes.

Next Steps in the Rulemaking Process

The proposed rule is open for public comment for 30 days, after which the Department will review submissions through the federal rulemaking process before publishing a final version in the Federal Register.

If adopted in its current form, implementation would begin in July 2026, aligned with statutory timelines and the academic calendar, giving institutions limited time to revise financial aid policies, disclosures, and compliance systems.

Substantively, the proposal represents a shift in how federal graduate lending operates. Open-ended borrowing tied to institutional pricing would be replaced with fixed statutory limits, reducing federal exposure while transferring planning risk to students and schools.

Even before finalisation, the regulatory direction is clear, and institutions and borrowers would need to account for tighter controls and reduced flexibility well ahead of the 2026 start date.