New Federal Loan Caps Prompt Bankruptcy Warning for Graduate Borrowers

New federal borrowing limits for graduate and professional students are drawing a bankruptcy warning from former U.S. Bankruptcy Court Judge Sarah Sharer Curley, who expects filings to increase as some students turn to private loans.

Curley served on the U.S. Bankruptcy Court for the District of Arizona from 1986 to 2014. “The rate of bankruptcy filings will most likely increase,” she said. Her concern is that students facing narrower federal borrowing options may seek private credit.

Public Law 119-21, signed July 4, 2025, began limiting federal graduate and professional borrowing on July 1, 2026. Annual Direct Unsubsidized loans are capped at $20,500 for graduate students outside professional programs and $50,000 for professional students. Aggregate limits for graduate and professional study are $100,000 and $200,000, respectively. The law also ended new federal graduate and professional PLUS loans.

A transition exception allows some students to keep the earlier limits. They must have been enrolled in a program and receiving a federal loan for that same program as of June 30, 2026. The exception covers the expected time remaining to complete the credential, up to three academic years.

Nonbusiness bankruptcy filings totaled 549,577 in the 12 months ending Dec. 31, 2025, an 11.2% increase from 494,201 in the year-earlier period. The 2025 total was about 47% above the 374,240 filings recorded in the 12 months ending Dec. 31, 2022. These figures cover nonbusiness cases broadly, not just cases involving student debt, and the periods ended before the new borrowing limits took effect.

Curley illustrated her concern about private borrowing with a hypothetical $300,000 medical-school loan at 16% interest. Over 10 years, she calculated, payments would be $5,017 per month, with $302,040 in interest. The example is not an actual loan offer or an estimate of typical market rates.

Federal law generally prevents government-backed education loans and qualifying private education loans from being discharged in bankruptcy unless repayment would impose “undue hardship” on the borrower and dependents. Borrowers seeking to discharge federal student loans must bring a separate proceeding in bankruptcy court.