State graduate student loans expand as federal caps reshape graduate financing

State graduate student loans are gaining attention after new federal borrowing limits took effect July 1, narrowing financing choices for people starting graduate school. Several states are expanding or promoting their own programs, but a state-backed loan can carry terms closer to private credit than to a federal student loan.

The federal changes affect the budget math for prospective graduate students. New borrowers in most graduate programs can borrow up to $20,500 a year and $100,000 over their lifetime through federal Direct Loans. Students in qualifying professional programs have limits of $50,000 a year and $200,000 in total, according to the National Conference of State Legislatures.

Graduate PLUS loans, which previously could cover a school’s cost of attendance after other aid, are unavailable to borrowers starting a new program on or after July 1. Borrowers who had already used Grad PLUS for their current program before that date may continue under a limited transition, for up to three years or until they finish the program, whichever comes first, according to Pennsylvania Higher Education Assistance Authority guidance.

That leaves a potentially meaningful funding gap. A Federal Reserve Bank of Philadelphia analysis cited by Georgetown University found that about 28% of roughly 66,000 graduate students enrolled from 2015 through 2024 borrowed more than the new limits.

How do state graduate student loans compare with federal loans?

Connecticut, Massachusetts, Minnesota, Pennsylvania and Rhode Island are among states that have recently expanded or highlighted graduate lending options, CNBC reported. State programs can offer features such as loans without a cosigner or financing designed for specific professions, but the details differ by program.

Minnesota’s SELF Grad Select Doctorate program, for example, offers designated doctoral students in fields including advanced dentistry, pharmacy and medicine a cumulative borrowing maximum of $300,000 without an annual limit, according to Georgetown University. That can provide more room than the new federal ceilings, but it does not make the loan a federal loan.

The key distinction is the contract. Interest rates can vary with the program, a borrower’s income and credit profile. CNBC reported that a Century Foundation analysis found some state-loan rates above 10%; Pennsylvania’s cited range ran from 3.29% to nearly 10.5%. Federal Direct Unsubsidized Loans for graduate and professional students currently have an 8.07% fixed rate, CNBC reported.

Rich Williams, a former Education Department official, told CNBC that many state programs are funded through bond sales rather than direct state appropriations. That structure means programs must generate returns for bondholders, one reason their pricing may differ.

The Century Foundation, a think tank, argues that state offerings can resemble private loans in cost, access and borrower risk. Federal Grad PLUS loans included access to income-driven repayment, Public Service Loan Forgiveness, deferment and forbearance. Private loans traditionally do not include income-based repayment or PSLF, the group said. Individual state programs may offer different terms, so borrowers should check rather than assume every protection is absent.

There is another moving part: the definition of a qualifying professional program is under litigation. A court order blocked the Education Department’s initial definition, and the department issued a broader temporary list that includes physical therapy, nursing practice and occupational therapy. NCSL said eligibility may change as the case proceeds.

For students comparing options, PHEAA advises reviewing total annual and lifetime borrowing needs, asking a financial-aid office whether the school has its own lower loan caps, and comparing rate ranges, repayment rules, cosigner requirements and hardship protections before using private education loans.

This story draws on original reporting from CNBC.