At first glance, the Trump administration’s push to privatize federal student loans might look like a political calculation. But the economics behind recent policy changes tell a subtler story.

Under the One Big Beautiful Bill Act (OBBBA), the administration’s sweeping higher-education and tax package, the federal government is tightening who can borrow and how much through programs like Parent PLUS and Grad PLUS. These loans have long been among the government’s most profitable, often taken out by creditworthy parents in the middle or late stage of their careers, or graduate students pursuing high-paying careers like medicine and law.

Now, new borrowing limits and the elimination of Grad PLUS for future students are changing that dynamic. Families and graduate borrowers who once relied on federal programs for large sums may soon find themselves turning to private lenders instead.

It’s a structural shift that accomplishes, in practice, what privatization would have done politically: it moves the most lucrative borrowers (and the profits that come with them) into the private market, while leaving the federal government with the less profitable parts of the student loan portfolio.

New Borrower Caps Start In 2026

Under the OBBBA, major changes are coming to federal student loan programs. For example:

• Starting July 1, 2026, Parent PLUS Loan will be capped at $20,000 per year and a $65,000 lifetime cap per dependent student. Previously, parents could borrow up to the cost of attendance minus other aid. 
• The Grad PLUS Loan program for graduate and professional students is being eliminated for new borrowers and in its place will be new limits on Direct graduate loans of $20,500 per year and $100,000 lifetime for most graduate students, and up to $50,000 per year and $200,000 lifetime for professional programs such as law or medicine. 
• At the same time the federal repayment options are being narrowed and protections reduced for new loans. Parent PLUS loans can only be repaid under the Standard plan, while new graduate loans will only have access to Standard or the new Repayment Assistance Plan.

In other words: after July 2026 for new borrowers, parents and graduate students will face tighter federal borrowing terms. And for parents specifically, there will be no pathway to Public Service Loan Forgiveness (PSLF).

Where Private Lenders Benefit

Here is where the economics come into play. Historically, Parent PLUS and Grad PLUS loans were among the most profitable segments of the Federal Student Loan Portfolio.

In 2024, the government made $2.76 for every $100 in student loans it lent out in PLUS Loans. It was the only segment of the portfolio that was profitable (and the overall student loan portfolio lost $19.64 for every $100 lent out). Back in 2018, Parent PLUS loans were delivering over $30 in profit for every $100 lent out. 

With the new caps in place, the federal government is deliberately shrinking its exposure to these more profitable borrowers.

So the logic goes: parents who need more than the new limits will turn to private student loans. Graduate students in expensive professional programs likewise will seek private loans if federal caps fall short of what they need.

As we said before: “This shift could lead to a rise in private loan use among graduate students, especially in fields with high tuition” under the OBBBA. 

From a policy perspective, that means the government is pivoting: it keeps the higher-risk and lower-return loans in house (under federal programs) and pushes the lower-risk/higher-return business to private lenders.

Why This Reduces The Push For Full Privatization

While the Trump Administration has talked about getting out of the student loan business completely and letting private lenders take over – these “baby steps” in the OBBBA make that a less desirable outcome for banks.

The law limits how much the government can lend to the kinds of borrowers who usually repay their loans in full, like parents with steady incomes or graduate students who become doctors and lawyers. Those borrowers are often the most profitable for lenders.

Because the government is lending less to them, banks and private lenders can step in to offer those loans instead. That means the “good business” — the borrowers who are most likely to pay back what they owe — moves to the private side automatically.

What’s left in the federal system are the loans that make less money (really that lose money) or carry more risk, like those for undergraduates or low-income students. The government keeps these loans mostly for public reasons, to make sure college stays accessible for families who can’t easily borrow from a bank.

So the government doesn’t need to sell or privatize its entire loan program. It’s already shrinking the profitable part of it through policy and letting private lenders take over that space naturally. And banks really only want the profitable loans – they don’t want to own loans that lose money or require more paperwork/overhead to maintain.

Implications For Consumers And Families

For families considering borrowing in 2026 and beyond, the implications are significant. A parent that used to be able to borrow up to the cost of attendance via Parent PLUS might now max out at $65,000 lifetime. 

But now, the math of Parent PLUS vs. Private Loans has changed – making private loans more compelling if you can beat the interest rate offered by Parent PLUS Loans. 

For graduate students in expensive programs (medicine, law, dental, etc.), the elimination of Grad PLUS means their federal borrowing limits may be lower than their cost of attendance. That gap directs them to private markets as well. 

Whether this shift is intentional or incidental, the fact is that more high earning borrowers may end up with private loans (which means more profits for banks and potentially more risks for borrowers) while the federal system retains a greater share of borrowers who are less profitable overall.

The result: banks increase profits on student loans, the federal government retains the less profitable loan segments, and overall there is less incentive to privatize the broader loan system.

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