An Unconventional Solution To Trump’s Loan Caps

Republicans put limits on federal student loans hoping colleges would lower tuition, only to find that a few schools are leaning into a workaround: lending to their students directly.

Trump administration officials and GOP lawmakers railing against the “out-of-control” cost of higher education used their domestic policy law last year to cap the amount of money people could borrow for graduate school. Schools would be forced to cut tuition and other expenses, they argued, if their students couldn’t borrow enough to fully fund their education.

But higher education experts fear the lending limits will instead push students into taking out more expensive loans in the private market, assuming they have a decent enough credit score and someone to cosign their loans in the first place.

“There is a great risk for law students who borrow substantial amounts of money outside of the federal loan program that they will fall into debt traps because the private bank loans do not have the loan repayment protections that the federal loan program has,” said Steven Freedman, associate dean of admissions at the University of Kansas School of Law.

As the Education Department’s loan limits approached this July, Freedman’s school wanted to give students an option beyond the private market if they exceeded the federal caps and had exhausted all other government funding possibilities. The school was among the first to take up an alternative in response to the caps, announcing in January it would start its own “institutional lending” program.

The college lending model isn’t common, especially at the graduate level, but is getting new attention as a potential lifeline for students who can’t get private loans.

Although the aim of the caps was to lower tuition, college presidents have said it isn’t so simple. Keeping up with increasing operational expenses, inflation and benefits for their faculty and staff means schools have to find other ways to make their programs accessible.

While direct-lending programs are on the radar of other schools, they are likely still assessing if it is the right move for them, said Sarah Austin, a policy analyst for National Association of Student Financial Aid Administrators, a group that represents the professionals who help craft loan and scholarship packages for students.

“I’ve definitely seen chatter of schools exploring it as an option. The interest is out there,” Austin said. “This first year they might want to see where the gaps are and the student populations they need to address.”

Starting their own lending shops isn't the only way colleges are trying to address the funding gap. Several schools are launching preferred lenders agreements — deals where colleges recommend specific private lenders to students and their families — or working with state-based lenders. And a select few have even lowered tuition and offered scholarships.

Education Undersecretary Nicholas Kent said he applauds schools that have announced “concrete steps to make higher education more affordable.”

“Whether through private or institutional lending, philanthropy, workforce partnerships, or state investments, now is the time for colleges and universities to pursue every opportunity to reduce costs for students and families and deliver a meaningful return on investment,” Kent said in a statement. “These are options governing boards and institutional leaders should be pursuing.”

Consumer advocates, though, aren’t fans of schools becoming their own lending shops, fearing it will do nothing to address the underlying problem of growing student debt and in some cases could lead to predatory loans.

“The substitute is just different debt,” said Austin Hinkle, who worked at the Consumer Financial Protection Bureau during the Biden administration and early into Trump’s second term. “Now you don't owe $50,000 to the federal government, you owe $20,000 to the federal government and another, $30,000 to some combination of the school or to a private lender.”

Hinkle, who is now managing partner at Public Goods Practice, a law firm specializing in higher education finance, said that while these programs have always existed, he anticipates they will become “increasingly popular” now that borrowers can no longer take out up to the cost of attendance in federal loans.

“They're framing it as a service that the school is providing to borrowers, but it's really just more private student loans that they're offering to make up for any gaps or shortfalls that the student faces from not being able to get enough funds from the federal government,” Hinkle said.

Graduate school deans like Freedman still think the institutional lending model could be a way to help make continuing their education more affordable for students. Freedman said his school’s program, with fixed interest rates and no co-signer requirement, offers their students better terms than most private lenders will.

“Their business is to make money, and that's who you're going to be dealing with for 20 years,” he said of banks. “Our business is to educate people and to get people started on their careers.”

Freedman said “less than 10 percent” of students will need to use the program, noting it would likely be out-of-state students who didn’t receive any scholarship funds. About 80 percent of students do receive scholarships.

“It’s more than anything to reassure the students that they will never need to take private bank loans, and they will never need a co-signer if they come to KU Law,” he said.

The program is funded by the KU Endowment, which is the fundraising arm for the University of Kansas that is separate from the university. But eventually it's intended to be self-funding, said Freedman, who hopes it will be a model other law schools adopt to fit the need.

Washington University School of Law in St. Louis announced in February that it launched a similar direct lending program for students.

Stefanie Lindquist, dean of Washington's law school, said officials first thought they could find banks to partner with to manage a program.

“We decided ultimately that this was the most effective way to go forward,” she said of the school launching the program on its own. “It eliminates the middleman.”

The program is funded using the larger university's financial resources, not the law school’s. She said it is financially feasible for the university to do this because their students have low default rates.

“Not every university will have the money available to make this happen,” Lindquist said.

More than 20 students have requested the loan so far, university officials said as of Aug. 27. They anticipate the program could more than double in size as more students hear about it. There are about 260 first-year law students, according to the school’s website.

But there are potential downsides when the school is both educator and lender. CFPB during the Biden administration expressed concerns about schools that were using this model and withholding transcripts from students who were late on payments. The agency found the schools “took unreasonable advantage” of their relationship with the borrower when they held both roles.

Officials at the Kansas and Washington law schools said they would not use any collection tactics beyond what a traditional private lender would use.

“We don't have any leg-breakers to go after students who can't pay it back. This is not a profit-making venture for us,” Freedman said. “This is a venture to make sure students can attend our law school, and when they graduate, they can enjoy the benefits of their education.”

Alex Ricci, president of the National Council of Higher Education Resources, an organization that represents private lenders, servicers, state agencies and other groups, said this model could help address a need for students.

If schools are willing to delay tuition revenue now because they know their students are good bets, then that could be fine, he said.

“But if it's used as a way to try and squeeze more money out of students and families as a short-term solution because they're on shaky financial grounds, it can become a gray area,” he said.

In the end, it all depends on how the programs are run, he said.

“Institutional loan programs could be a reasonable solution, but they have to be student-first,” he said. “They have to be thoughtful. They have to have terms and conditions that align with the best interests of the students in the program, and they have to be managed properly.”

Even with some higher education observers anticipating that these types of programs will become more common, they likely won’t crop up everywhere. Institutional lending programs are “a feasible option at only a small share of well-endowed institutions,” researchers at the American Enterprise Institute, a right-leaning think tank, wrote in a recent report.

Austin, with the National Association of Student Financial Aid Administrators, said a large endowment isn’t necessarily a must, but schools must have significant financial resources — and trust that their students can pay them back.

“Of course, they have to have the money upfront,” she said. “They have to have the funding from somewhere, but also be willing to take that risk.”