Students and their families are increasingly turning to private lenders for education financing following recent federal limits on student loan amounts, introducing new uncertainties around loan eligibility and terms.

Earlier this year, the U.S. Education Department implemented changes restricting federal graduate student loans and parental borrowing. Federal graduate loans are now capped at either $20,500 or $50,000 annually, depending on the field of study, with a lifetime federal loan limit of $257,500 covering both undergraduate and graduate borrowing. Parents are limited to borrowing up to $20,000 a year, down from previous rules allowing loans to cover the full cost of attendance. The department says these adjustments aim to alleviate long-term debt burdens associated with rising college costs.

Victoria Chasin, a 24-year-old medical student from Colorado, exemplifies the shifting landscape. Accepted to medical school with expectations of $50,000 in federal loans per year, she quickly realized the federal caps would not cover her full costs. With her father cosigning, she secured a $54,000 private loan at a 3% interest rate, aided by making small monthly payments while still in school. Nonetheless, Chasin expressed concern about the unpredictability of private loan rates and the possibility of needing additional loans each year.

Unlike federal loans, which have fixed interest rates and do not require credit checks, private loans assess creditworthiness and income to determine eligibility and interest rates. Federal loans offer income-based repayment plans and loan forgiveness options for qualifying public service employment, benefits often unavailable through private lenders. Advocates warn that the pivot toward private lending could leave many students unable to secure necessary funding.

Kristin Blagg, a research associate specializing in higher education policy, noted that borrower access to private loans varies significantly based on credit profiles. In response, some private lenders are easing credit requirements to meet rising demand. South Carolina Student Loan, for example, lowered its minimum credit score for healthcare students to 600, compared to the typical threshold of 670. The lender has reported a 300% to 400% increase in graduate loan volume compared to last year, with average loan amounts rising from $19,000 to $34,000. It also introduced a specific forbearance program for medical residents.

Sallie Mae, one of the largest private student loan providers, anticipates a 12% to 14% increase in private loan originations this year, attributing growth to the federal loan caps. Smaller lenders like ELFI, affiliated with SouthEast Bank, have also expanded staff to handle an increased number of prequalification applications from students and parents.

While private loans often come with higher interest rates than federal options—in this year’s federal graduate loans, rates are fixed at 8.07%—some borrowers with strong credit can secure more favorable terms. Marni Sassaman, who opted for private loans to finance her son’s education, said she was able to obtain rates lower than the current 9.07% charged on federal Parent PLUS loans. She cited the rapidly changing federal student loan environment as a key factor in her decision.

Federal student loans still constitute over 90% of the outstanding student debt balance, but the new lending caps and the resulting growth in private borrowing are expected to significantly reshape the student loan market in the coming years.