KEY TAKEAWAYS
- The “One Big, Beautiful Bill” lowers the amount of federal student loans many families will be able to take out for their undergraduate students starting in the next academic year.
- Personal loans, such as home equity loans, bank loans, or 401(k) loans, may offer better terms than some private student loans—but they are typically not recommended to cover educational costs.
For the next school year, many families of college students will have less access to federal student loans than in years past, and will need to find the best alternative to help their student pay for their education.
The “One Big, Beautiful Bill” generally lowers the amount of federal student loans offered to students and their families for higher education costs. Starting in the 2026-27 academic year, families will have an annual limit of $20,000 on Parent PLUS loans, where the previous limit was set at the cost of attendance at the student’s school. The bill also introduces an aggregate cap of $65,000 per child for parents.
The amount of federal student loans that undergraduate students can take out themselves will not change, but the new Parent PLUS limits will restrict federal financing options for some families.
Nearly three in 10 current Parent PLUS borrowers are likely to encounter problems with the new limit, and about 22% will be constrained by the aggregate cap, according to a Brookings Institution analysis of data from the National Center for Education Statistics.
Additionally, middle-to-higher income families who are not eligible for Pell Grants are more likely to encounter problems with the limits. Almost half of families who earned more than $130,000 per year borrowed more than $20,000 annually, according to calculations from the Brookings Institution.
Why This Matters
Families must find smart ways to pay for their children’s education as tuition and fees continue becoming more expensive and federal student loans are being limited. Many parents underestimate the cost of college, and if they cannot repay the loan they took out, they may face a credit hit, delay their retirement, or even put their home at risk.
What To Do Before Borrowing
The most important thing families should do is to calculate how much the tuition will cost over four years for their undergraduate student and ensure they can afford it.
“I’ve spoken to parents of high school students who have kids going off to college,” said Jack Wang, college financial aid advisor at Innovative Advisory Group, and host of the Smart College Buyer podcast. “They will say, ‘We’ll borrow $20,000 a year’… and I keep having to remind them, ‘Yes, you can do that, but then you have to come up with a different strategy for year four, because that Parent PLUS loan is not going to be there for you’.”
That may also mean that their student will have to choose a less expensive school and determine if the cost of a four-year university is worth it. Families with children who are seniors in high school should also start applying for federal aid and scholarships.
Private Student Loans
Once a dependent student, who can take from $5,500 to $7,500 a year in federal loans for themselves, and their parents have reached the limit of federal student loans they can take and do not have the funds to pay for the remainder, the next step for most families is to consider private student loans, Wang said.
Private student loans tend to be riskier than federal student loans, as they often have higher interest rates and do not offer the same forgiveness programs available to federal loan borrowers. While some private loans allow for payments that adjust for income changes and offer forbearance for borrowers experiencing financial trouble, it is not guaranteed, unlike federal loans.
“Private student loans are good alternatives to federal loans,” Wang said. “It’s just that people need to really understand the differences and what they may or may not be getting compared to federal student loans.”
Families who apply for private loans will also undergo a credit check, a process that federal loans do not require. As a result, borrowers with low credit scores may receive worse loan terms, and most students will need their parents or grandparents to co-sign the loan with them.
“I talk to otherwise highly-intelligent parents who don’t realize that co-signing means that they are also legally on the hook for those loans, and [missed payments] will show up on their credit report and will impact their ability to get other loans or refinance their mortgage,” Wang said.
Personal Loans
Some families may use personal loans, such as home equity loans, bank loans, or 401(k) loans, to pay for educational expenses. However, Wang said these types of loans should typically not be used to pay for education over any federal or private student loans.
In some cases, families with good credit can get more favorable terms on a home equity line of credit. For the 2025-26 academic year, the interest rate for a Parent PLUS loan is 8.94%. Meanwhile, the average interest rate for HELOC loans is 7.82%, as of Nov 1, according to Bankrate.
However, it is generally recommended that HELOC loans only be used to increase the borrower’s home value, such as for renovations or repairs. Compared to a student loan, where a missed payment hurts a borrower’s credit, missing a HELOC payment can put the borrower’s home at risk.
Taking out a 401(k) loan can be another option for financing a child’s college education. This type of loan draws money from the parents’ retirement fund; however, if that money were still there, it might have been earning interest or benefiting from a market surge.
