Federal Student Loan Limits

Current Situation:

The Federal Family Education Loan Program (FFELP) and the Federal Direct Loan Program (FDLP) have annual borrowing limits that are based on grade level.  The annual limits per grade level are listed in the chart below:

  *The unsubsidized amount for grades 1-5 is only awarded to student's who are considered independents or whose parents are denied parent loans for credit reasons.

Issues:

Since 1992 the average price of college tuition has increased approximately 42%. The last time loan limits were raise for first-year students was 1986. The last time loan limits were raised for all other students was 1992. Loan limits were not raised during the HEA reauthorization in 1998. We regret this fact since we warned that without an increase in the federal limits borrowers would increasingly turn to private label loans. That was a prediction that has come true.

Proposed:

Raise loan limits to those listed in the table below:

*The unsubsidized amount for grades 1-5 is only awarded to student's who are considered independents or whose parents are denied parent loans for credit reasons.

This is a straight-line inflation increase from the last time loan limits were raised in 1992. Such estimates use the Consumer Price Index (CPI) inflation index rather than the higher education index (HEPI) since the CPI is the federal standard and HEPI is less recognized by the federal government. If we had used HEPI our proposed loan limits would have been considerably higher.

Possible Objections:

Raising loan limits will result in an even more unmanageable debt burden for students and also increase default rates.

A consequence of raising loan limits would be the increase in subsidies paid to loan holders by the government.

Counter Argument:

The student loan industry as a whole is entirely more focused on best practices in debt management than it was in 1992 when the last loan limit increase was seen.  Schools, lenders and guaranty agencies are now held accountable for their default rates and two additional lower payment options have been developed to assist borrowers with higher debt levels.  The Department of Education has partnered with industry participants to experiment in better ways to assist borrowers with their debt levels and best practices such as Voluntary Flexible Agreements and Experimental Sites.

Raising loan limits has the potential of increasing loan holder return for very little additional output.  We therefore suggest that subsidies be decreased accordingly so as to maintain return and taxpayer costs.