Federal undergraduate student loans have more favorable terms and benefits than private loans or federal loans to parents, but their purchasing power has declined because of inflation. Federal undergraduate loans are subject to annual limits that range from $5,500 to $12,500, but these limits are not linked to inflation and have not changed since 2008. Because of consumer price inflation, their real value has declined by 22 percent (a $1,210 loss in purchasing power for a dependent first-year student). High inflation rates threaten to erode the value of federal loans even faster and might limit the program’s success in increasing college access and completion.
To help policymakers weigh the pros and cons of raising loan limits, this brief examines data on students constrained by borrowing limits and the evidence on how prior loan limit increases affected students and institutions.
Research shows that when students have access to higher loan limits, some tend to borrow more, but the loans often replace higher-interest forms of debt. And increased access to credit can improve student persistence and completion, but those benefits must be balanced against the burden that higher levels of student debt could have on borrowers when they reach repayment.
Although inflation has eroded the purchasing power of loan limits, we do not find that more students are reaching their annual loan limit. The share of all undergraduates borrowing the maximum has been roughly constant for well over a decade. But dependent students at four-year schools are most likely to borrow up to their loan limit, and these students are more likely use Parent PLUS Loans and private loans with higher interest rates and fewer protections to fill the gap between aid and their cost of attendance.
Policymakers who want to increase undergraduate loan limits have several options. One approach would simply restore the real, inflation-adjusted value of the 2007–08 loan limits. Policymakers could also link the loans to consumer price inflation so they automatically maintain their purchasing power, especially during times of high inflation. Historically, policymakers have not considered different limits for different undergraduate degree levels, differentiating only by dependency and year in higher education. But policymakers could consider more limited increases for students most constrained by the current limits and most likely to take on risky supplemental loans, such as dependent students pursing bachelor’s degrees.