Rethinking Predatory Student Lending | American Enterprise Institute
The One Big Beautiful Bill Act ended the Grad PLUS loan program for new borrowers and replaced it with annual and aggregate limits on federal borrowing that came into effect on July 1, 2026. Students who want to borrow beyond those limits will now have to turn to private lenders.
That prospect is making a lot of people nervous. Many graduate students have little experience using consumer credit, and they will likely encounter terms and conditions that seem foreign, including the possibility of double-digit interest rates. We’re likely to soon be hearing cries of “predatory” lending practices from consumer and student advocates.
But despite the popularity of the term, there isn’t a universally agreed-on definition of predatory lending. In general, though, it refers to deception regarding the terms and conditions of the loan; unfair terms (including excessively high interest rates and fees); and even the practice of originating a loan that the lender anticipates will be excessively burdensome for the borrower to repay.
The first type of predation is the easiest to identify. Lenders have a legal obligation to accurately disclose the terms of the loans they offer to borrowers. And falling short of that standard can lead to legal penalties including discharge of the loan.
The second type is far harder to pin down because “fair” lending has no objective benchmark.
In considering what constitutes an “unfair” interest rate, for example, it’s useful to remember that the interest rate is the price of credit: it reflects the costs and risk that a lender takes on when they originate a loan. With student loans, lenders take on considerably more risk than with other types of consumer credit because they hold no collateral—there is nothing for the lender to repose and liquidate to cover their losses (like a car or a home) should the borrower default. Additionally, student loans need to be originated before a student even finishes their degree, pricing in an additional layer of uncertainty since the borrower may not complete their degree nor land a job that would facilitate repayment. For both of those reasons, student loans generally carry interest rates higher than those of auto loans or mortgages.
One implication of market-based lending is that borrowers with less economic advantage will tend to be offered higher rates due to lower credit scores and less ability to find creditworthy cosigners. While this outcome may be undesirable, differential pricing is not, in itself, evidence of predatory lending practices.
In some cases, an expensive loan may create substantial value. Consider a cash-strapped student who is one year away from completing their degree. Access to credit could allow them to complete that degree, making it affordable to repay all of their debt. Without it, that student might have to drop out of school and could find themselves under a mountain of unaffordable debt. A relatively high-interest loan that allows that student to finish their degree may therefore be a lifeline to economic prosperity. Without the ability to adjust the interest rate to account for risk, a lender likely wouldn’t be willing to originate that loan, preventing the student from graduating and making their existing debt load unaffordable.
The last facet of our working definition for predatory lending is whether a loan is made with the belief that it will be repayable. In general, the private loan market is self-policing on this front—lenders lose when a borrower doesn’t repay their loan, incentivizing them to ensure their loan is affordable. But in some cases, the private market hasn’t gotten this right. The mortgage crisis of 2008 was driven, in significant part, by borrowers being approved for mortgages that the lender could, and should, have known they wouldn’t be able to afford to repay.
But that occurrence doesn’t mean that government lending is automatically safer. Extending credit without considering affordability is harmful regardless of who makes the loan.
That was the central flaw of the now-defunct Grad PLUS loan program. Because Grad PLUS was designed to expand access, its lack of underwriting was often treated as a virtue rather than a liability. It issued large sums of debt without ever considering whether the borrower would be able to afford to repay it. Yet Grad PLUS was seldom criticized as being a predatory program despite it repeating the lending practice that fueled the Great Recession.
The transition away from Grad PLUS, beginning with this fall’s entering class, will likely be chaotic. Financial aid administrators, regulators, and students will be facing a new reality, and all parties should be on the lookout for predatory practices in this new emerging market. But know that, at the same time, the elimination of Grad PLUS may create an environment with less predatory behavior than the regime we’ve left behind.
