Some states are helping graduate students pay for school. Here's what borrowers should know

As the federal government shrinks its lending options for graduate education, more students are turning to state-based loans to cover the costs.

But experts say it's important that borrowers closely look at the fine print since these programs more closely resemble private loans than federal ones.

Both Connecticut and Minnesota expanded into graduate loans this year after the Trump administration phased out Grad PLUS loans for new borrowers and imposed borrowing limit caps. In all, there are roughly two dozen state student loan lenders that offer broad-based assistance to help students fill education funding gaps. Some states such as Massachusetts, Arkansas and New Jersey, have offered loan programs for decades.

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Where federal loans might now have loan limits and private lending may be hard to access, state loans exist "sort of in the middle," said Rajeev Darolia, professor of public policy at the University of Kentucky. These programs may also offer more favorable terms or protections than what's available in the private market, he added.

While state student loans can be good options for some borrowers, they typically don't come with the protections of federal loans, such as forgiveness and income-driven repayment plans, which are not available in most states. Borrowers may then run into issues with their servicer or the lender if they fall behind on loans, according to a critical analysis of state student loans by advocacy group Protect Borrowers.

"State loans are essentially private loans, just a different flavor," said Betsy Mayotte, president and founder at The Institute for Student Loan Advisors.

"In some cases, state student loans can be better terms and conditions-wise and protection-wise than a more traditional private student loan," she added. "But that's not always the case."

Why states are in the business of offering student loans

The vast majority— at least 90% — of student lending in the U.S. comes from the federal government.

Federal lending offers benefits, such as subsidized interest rates, flexible repayment plans and the ability to take out loans regardless of what the borrower studies in school.

Private lenders are on the opposite side of the lending spectrum and offer loans expecting a return on their investment, Darolia said. Private lenders such as banks tend to underwrite, he added, which means they examine the application to determine the risk level of the applicant. That might result in borrowers needing a co-signer with better credit, or lenders pricing the loan based on creditworthiness.

Some states have been offering student loan options for decades, going back to at least the early 1980s. After the Reagan administration scaled back the federal government's financial aid programs, Massachusetts created the Massachusetts Educational Financing Authority, or MEFA, in 1982 to offer low-cost loans to parents and families in Massachusetts, a state with a robust system of private universities, said Tom Graf, the state authority's executive director.

After the Trump administration reduced federal lending for grad students in 2025, schools came to MEFA asking for the agency to create a grad loan and help fill the gap, he added.

"We had already begun the process. We knew what was coming," Graf said. MEFA had offered some grad lending in the past, but had primarily left that to the federal government. With the changes, it made sense for MEFA to offer more.

"But could we fill the whole entire gap of a hundred or, ultimately, hundreds of millions of dollars a year? No. We're just not big enough," he said.

As in the 1980s, the federal government has reduced federal student loan options. States may now be "looking at their state loan program offerings in response" to Trump's signature tax cuts and spending bill signed last summer, said Andrew Smalley, senior policy specialist in education at the National Conference of State Legislatures.

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Trump's signature law made several changes to student loan offerings and repayment, including the elimination of the federal Grad PLUS loan program for graduate students, which previously covered the full cost of attendance. Now, graduate students are limited to $20,500 per year, or $50,000 per year for certain "professional" students, such as doctors, veterinarians and lawyers. There are lifetime limits for each group, too.

State-based loan options can vary, including on eligibility rules, borrowing limits, interest rates and repayment plans. Some are administered directly by state agencies, while others are quasi-agencies, nonprofits or private loan authorities, according to the NCSL.

Other states may also offer forgivable loans, which are contingent upon a borrower working in a specific profession, or specialty loans that are also specific to a program, school or profession.

Sophie Laing, a legal aid attorney who authored the Protect Borrowers report, said she saw a litany of complaints about state student loans to the Consumer Financial Protection Bureau. To her, that indicated that the field has been overlooked within the larger student loan conversation.

"The states that are looking to increase their lending or starting programs, a lot of their rhetoric around it is making education more accessible and affordable to students," she said. "But if that really is their goal, then we should look at the experience borrowers have had with these programs and try to fix some of the past, or current, mistakes that are really harming borrowers."

What borrowers should know about state-based loans, according to experts

Since each state's loan offerings are different, experts say borrowers should be diligent about understanding the terms of their loan options.

"It's just so important for people to understand what the rules are for the product that they're using and what's going to happen if they run into financial difficulties and can't pay it," Mayotte said.

State student loans can have substantial drawbacks compared to both federal and private loans, Laing said. Those drawbacks, which combine unfriendly aspects of both federal and private loans, can "pose some unique risks to borrowers," she said.

States sometimes have the ability to garnish wages or access state tax offsets. This is similar to the authority of federal lenders, Laing said. Private lenders, in contrast, would need to go through the courts first to get their money back.

State lending agencies can use creditworthiness to determine eligibility. Unlike federal loans, which are broadly available regardless of credit, experts worry that certain measures of creditworthiness, such as relying on credit scores, can box out lower-income borrowers.

State loans are also often funded by bondholders, to whom they're financially accountable. As a result, lenders may feel pressure to charge higher interest rates or fees to satisfy investor returns, Laing wrote in her report. That contrasts with federal loans, which have not been able to pay for themselves, "largely due to income-driven repayment," said Robert Kelchen, professor of higher education at the University of Tennessee, Knoxville.

Student loan agencies may have the ability to claim "sovereign immunity," a legal claim that says a government cannot be sued without its consent. Laing says this can take away borrowers' rights to sue the lender if they feel their rights have been violated.

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At the same time, some state loan programs do have options that more traditional private student loan lenders wouldn't have, Mayotte said.

State student loan rates can also be lower than private loan rates for borrowers with co-signers or good credit. Private lenders can also offer lower rates to borrowers they expect to have lucrative careers, like doctors or lawyers, Darolia said.

A handful of states offer options if borrowers are in a financial bind. Those types of repayment plans are largely not available from traditional private lenders, Mayotte said.

MEFA, for example, offers "modified repayment plans" that can sometimes be as low as an interest-only payment, Graf said.

Some state loans may be available to out-of-state students, though some are restricted to residents or those attending an in-state school.

If students need to borrow money for college, experts say they should exhaust all their federal options first. On its website, MEFA strongly encourages new borrowers to take that step before turning to other loans. That includes state, private and institutional loans, or loans offered by the schools themselves.

The bottom line? "A loan is a loan is a loan," Mayotte said.

"You should be reading the terms and conditions and understanding how much you're borrowing, what the payment's going to be, and what your options are going to be if you can't pay it," she said.