The federal student loan program, particularly for graduate students, results in substantial taxpayer losses, with the government expected to lose $130 billion over the next decade. Federal loans distort the education market, inflating tuition costs and encouraging low-return degree programs. The easy availability of loans also supports degrees that do not justify their high costs, leading to financial struggles for graduates and unnecessary burden on taxpayers. The One Big Beautiful Bill Act (OBBBA) eliminated grad PLUS loans to graduate and professional students, capped aggregate Stafford loans (and lifetime total direct loans) to graduate and professional students, and capped annual and lifetime aggregate parent PLUS loans. However, further reforms are merited.

Policymakers should eliminate the federal parent PLUS and graduate Stafford loan programs and let private lenders serve the market. Private lenders could provide loans for high-return fields, which already have strong repayment prospects. Policymakers should also enhance the private sector’s capacity by reforming regulations to allow innovative lending practices that focus on future earnings potential rather than traditional credit history and by allowing IRS earnings data to be linked to student enrollment records. Savings from privatization (including from OBBBA’s partial elimination of grad PLUS loans and its caps on other loans) could be directed to expanded financial aid to low-income students and to tax credits to incentivize the supply of teachers and other socially valued professions (or to state block grants for the same purposes).