WHAT WOULD HAPPEN TO TAXPAYERS ONCE THE GRAD PLUS LOAN PROGRAM IS ELIMINATED?

CHALLENGE

• Legislative Context

  • The One Big Beautiful Bill Act (OBBBA), signed into law on July 4, 2025, provides the primary legislative mandate for the elimination of the Graduate PLUS Loan Program.

  • In 2025, the U.S. Department of Education’s Reimagining and Improving Student Education (RISE) Committee reached a consensus on implementing these statutory changes.

  • Authority for new lending after this date will shift to Direct Unsubsidized Loans with strict annual and lifetime caps–$20,500 annually–replacing the previous model that allowed borrowing up to the full cost of attendance.

• Constitutional Context

  • Article I–Power of the Purse: The primary constitutional authority for all federal student loan programs, including Graduate PLUS, is derived from Article I of the Constitution, which vests Congress with the "power of the purse." This enables Congress to determine how to spend public monies on national priorities.

  • Supremacy Clause: Under the Supremacy Clause, federal laws governing student loan programs often preempt conflicting state regulations, ensuring uniform standards for federal loan servicing across the country.

• The Issue: The central problem with the Graduate PLUS Loan Program has an uncapped borrowing structure, which allows students to borrow up to the full cost of attendance set by their own universities, and this structure creates the following issues:

  • Tuition Inflation: Because universities knew the federal government would automatically cover any price they set, they had little incentive to control costs. In fact, a 2023 working paper from the National Bureau of Economic Research found that for every $1 in extra federal lending, graduate programs increase net tuition by roughly $0.64.

  • Unsustainable Debt: Although Grad PLUS was used by only 16% of graduate students, those borrowed accumulated an outsized 32% of all federal graduate loan disbursements. And as of 2025, approximately 1.8 million borrowers collectively held $1.2 billion in Grad PLUS debt. 

  • Financial Risks to Taxpayers: analysis suggested that graduate-degree debt could eventually account for three times more forgiven balances under income-driven repayment plans than undergraduate debt, potentially creating a significant long-term burden for taxpayers.

  • Misalignment of Value: The program  subsidized high-cost degrees that did not always provide a return on investment (ROI) sufficient to repay the loans, effectively acting as a "cash cow" for institutions while leaving students with unmanageable debt loads.

High Interest & Fees: Grad PLUS loans were more expensive than other federal options, featuring higher interest rates (e.g., 7.54%–8.9%) and a substantial 4.22% origination fee.

OUR APPROACH

• General Approach: Our approach is rooted in providing a holistic overview and specialized guidance for each issue that needs to be solved. We utilize an inclusive, data-driven process designed to help institutional leaders navigate complex legislative and regulatory environments. 

  • Our strategic approach typically follows these key objectives: 

• Restructuring and Planning: We help institutions create and implement multi-year plans to restructure both operations and balance sheets, ensuring long-term stability. 

• Data-Driven Analysis: We work closely with client administration and faculty to produce rigorous analyses, providing clear insights into the potential impacts of various decision scenarios.

• Inclusive Decision-Making: We prioritize an inclusive process to ensure that changes are not only strategically sound but also effectively implemented across the organization.

• Agile Team Structure: To remain cost-efficient and augmentative, we deploy small, specialized teams that integrate directly with the client's existing staff.

• Our Position on this Issue: Aristeia supports the elimination of the Grad PLUS Program on grounds that it will create a massive economic relief for taxpayers, reduce federal spending, and limit the federal government’s role in student lending.

• Our Plan for this Issue: We develop a comprehensive policy proposal examining how the elimination of the program would deliver significant ROI for taxpayers–add more to their purchasing power and reduce the cost of living by considerable margins. This proposal is submitted to the Committee for Education Funding (CEF) and to Senators in favor of the elimination of the program: Senator Bill Cassidy (R-LA), who is the Chairman of the Senate Health, Education, Labor, and Pensions (HELP).

RESULTS

• Substantial Budget Savings 

Congressional Budget Office (CBO) scoring shows that ending Grad PLUS loans, combined with new caps on unsubsidized graduate loans, generates meaningful deficit reduction:

• Approximately $40 billion in savings from simply eliminating Grad PLUS for new borrowers.

• Broader package estimates (including caps) project $12 billion saved by FY 2029 and $40.6 billion by FY 2034.

• When paired with repayment reforms, overall student loan changes under the law save taxpayers an estimated $307 billion over a decade.

• Lower Losses on Loans

  • Recent CBO estimates indicate the government loses about 24 cents for every dollar lent through Grad PLUS due to income-driven repayment (IDR), Public Service Loan Forgiveness (PSLF), and other programs—far from the “profitable” claims made when the program launched in 2006. 

  • Grad PLUS borrowers (about 1.8–2 million people) hold a large share of graduate debt—32% of all graduate loan disbursements despite representing only 16% of grad students—often in high-cost programs with poor earnings-to-debt ratios. Unlimited borrowing enabled overborrowing, and much of that debt is now on track for partial or full forgiveness at taxpayer expense. Ending the program stops new loans from entering this loss-making pipeline.

    
    

• Curbing Tuition Inflation and the “Bennett Hypothesis” Effect

A National Bureau of Economic Research study found that for every additional dollar of federal Grad PLUS funding per student, net tuition rose by 64 cents. Colleges raised prices knowing students could borrow uncapped amounts to cover the full cost of attendance. By removing this moral hazard, elimination puts downward pressure on graduate program costs over time. Taxpayers benefit indirectly because:

• Future students borrow (and potentially default on) less.

• Less pressure on federal aid programs overall.

• Reduced need for future bailouts or expanded forgiveness.

  
  

• Shifting Risk Away from Taxpayers to Private Markets and Borrowers

Grad PLUS had no meaningful credit check and unlimited borrowing, transferring nearly all risk to the federal government (and thus taxpayers). Private lenders will now play a larger role, applying credit standards that discourage unsustainable borrowing. This reduces the federal portfolio’s exposure and encourages better alignment between program costs and actual labor-market returns.