By: Eric Johnson
One of the more sweeping changes in the One Big Beautiful Bill Act (OBBBA) that fundamentally alters the trajectory of higher education is the elimination of the Graduate PLUS Loan program. Grad PLUS Loans were a staple for many graduate students, as they covered tuition costs during an inflationary period in graduate tuition pricing. Grad PLUS Loans did not feature a lifetime aggregate loan limit like the Direct Loan program. In addition, these loans did not include an annual loan limit. Graduate students could borrow up to their school’s cost of attendance budget with a Grad PLUS Loan.
According to data published by the National Center for Education Statistics, average graduate tuition and required fees for all institutions were $11,621 in the 2005-06 academic year. Beginning in the 2006-07 academic year, the first award year with Grad PLUS Loans as a funding option, average graduate tuition and required fees increased to $12,312, a 6% increase year-over-year. By the 2021-22 academic year, average graduate tuition and required fees spiked to $20,513, a 76% increase over 15 years.
Private, non-profit institutions witnessed a 74% increase in graduate tuition and required fees over the past 15 years. Public institutions in the 25th percentile saw graduate tuition and required fees surge by 102% over the same period. The average increase across all public institutions, regardless of percentile, was 94%.
Source: National Center for Education Statistics
Federal Student Aid (FSA) programs are known in economics as subsidies. Subsidies are funds provided by a government, in this case the federal government, to assist an industry or business so that its pricing mechanisms remain low or competitive for customers who consume its products or services. Subsidies often begin with good intentions. For students who desire a graduate degree, a federal student loan enables them to access financing that may not always be available in the private lending market. It also allows schools and institutions to source new customers (i.e., “students”) who may not have been able to afford tuition and required fees previously.
Although some students display high earnings potential, private lenders require students to have robust credit histories and collateral to support their lending decision. Students with an inadequate credit history or insufficient collateral often find themselves frozen out of the private education loan market. This symptom is a classic example of a market failure.
The federal government recognizes the flaw in this system. By creating a credit crunch for students with earnings potential but who do not meet the private education loan lenders’ standards, students who are otherwise eager to pursue advanced education cannot do so. This result creates a market inefficiency, as human capital does not increase in this society despite an eager student population. To remedy this foible, the federal government offered guaranteed Direct Loans and Grad PLUS Loans with no credit history constraints. This action increased liquidity in the student loan market. It also allowed students to invest in their human capital, which had previously been hindered by the restrictive loan standards of private lenders.
As liquidity surged to borrowers and schools, a previously untapped market of customers emerged. Before the 2006-07 academic year, graduate students’ only federal financing options were unsubsidized loans. Unsubsidized loans had annual and lifetime aggregate loan limits, which often created a funding gap for students. Students who were unable to tap into the private education loan market suddenly found themselves squeezed out of their graduate coursework.
Just as students benefited from this increase in liquidity in the education loan market, so did graduate schools. In 1987, then U.S. Education Secretary William Bennett advanced a famous theory that partially explains what happened to graduate tuition since the inception of the Grad PLUS Loan program. Known as the Bennett Hypothesis, this theory argues that institutions of higher education raise tuition to capture available financial aid sources, knowing that students can borrow or qualify for additional funding from these uncapped sources. As students’ purchasing power increased due to the Grad PLUS Loan program, demand for graduate education shifted up along its aggregate demand curve.
Initially designed to curb or cushion increases in graduate tuition, schools became incentivized to raise prices to capture additional revenue aggressively. In the context of basic economics, price increases generally signal two things: an improvement in quality or the need to cover additional costs. Graduate schools realized they could raise tuition above their usual levels, even if it meant a reduction in market share. Why? With abundant federal funding from the Grad PLUS Loan program, it did not need a ginormous enrollment bump to capture additional revenue streams. Schools could charge their existing student base more, knowing that a liquid financing stream was available from the federal government.
Not all schools participated in this chicanery. But many did. In a May 2023 working paper from the National Bureau of Economic Research, researchers discovered that graduate programs with the highest exposure to the Grad PLUS Loan program raise their net prices by 60% after the 2006-07 academic year. A September 2025 Higher Ed Dive article revealed that the median debt for graduate borrowers using Grad PLUS Loans went from a modest $21,800 to $57,800 by the 2019-20 data. These revelations are consistent with the National Center for Education Statistics’ findings on graduate tuition and required fees.
Schools that offer master’s programs do so to provide students with an opportunity to enhance their skill sets, ultimately improving society’s overall human capital. An erudite society is far more prosperous than an inerudite one. For most students, a master’s degree is often necessary for a variety of reasons, ranging from improved job prospects to enhanced skill training in a niche field or topic. As the number of master’s degrees conferred surged in the 2010s, so did revenue opportunities for graduate schools. Without the cushion of grants or scholarships, graduate students quickly realized their funding options narrowed to loans.
There are dubious facets to this theory. Research by Robert Kelchen, a professor at the University of Tennessee, Knoxville, shows that professional degree programs, such as Juris Doctorates, did not exactly follow the Bennett Hypothesis. In this example, law students shifted from the private student loan market to the federal student loan market. Tuition increases at law schools did not exceed their expected norms, as doing so would create a prisoner’s dilemma for all schools involved.
What does the elimination of the Grad PLUS Loan market mean for students and schools? Let’s first create a diagram scenario of the game theory involved in graduate tuition pricing with Grad PLUS Loans.
With the introduction of Grad PLUS Loans in the 2006-07 academic year, students and graduate schools saw two different outcomes. Students’ demand for graduate school increased as liquidity constraints in the credit market for graduate education loans dissipated. Therefore, inelastic demand resulted. New graduate students were willing to pay a higher graduate tuition rate than their predecessors. Graduate schools reaped a windfall from increased tuition revenue from their graduate programs. Grad PLUS Loans did two things simultaneously for grad schools. First, it expanded their customer base to new students who were previously shut out of the grad school market due to limited or no financing options. Second, the uncapped loan program led schools to charge above their normal levels to maximize revenue (prices higher than their marginal cost). While maximizing revenue was a boon for many schools, it also reduced competition among institutions. Grad schools did not have to rely solely on increasing their enrollment figures each year. They could increase their revenue with fewer students because abundant financing for grad school was available through the Grad PLUS Loan program. As a result, students saw their consumer surplus fall while grad schools produced a much higher producer surplus.
In our second exercise, Grad PLUS Loans no longer exist. What happens to the two players in our game, students and graduate schools? Unlike our simple game in exercise one, exercise two results in a multifaceted strategy between the two players. Let’s first analyze the decisions made by students in the world of no Grad PLUS Loans.
Graduate students suddenly become price-elastic (i.e., price-sensitive) in this new game. Price elasticity arises because graduate students face an unmet need dilemma (i.e., funding gaps) in financing their graduate studies. These funding gaps existed before the creation of the Grad PLUS Loan program. Prospective grad students have three dominant strategies to pursue in this new game:
Grad students who cannot afford their school’s tuition exclusively through an unsubsidized loan will need to do a cost-benefit analysis to determine whether graduate school makes sense as a return on investment activity. As price elasticity reemerges among graduate students, their selection of schools and graduate programs will become a return-on-investment exercise. Therefore, it is logical to assume that graduate students will become more choosy about their graduate school options. Some students may decide to eschew graduate studies in favor of better ROI options, such as workplace skilling or credentials from alternative sources.
Once a dominant player in graduate school financing, private education loans decreased significantly following the implementation of the Grad PLUS Loan program. Now that Grad PLUS Loans no longer exist as a funding option, we can safely assume a resurgence of students returning to private education loans as a financing tool in their graduate studies.
Students with a healthy credit history and collateral may face few to no barriers in obtaining a private education loan. Students who do not share those characteristics will not be able to obtain a private education loan without a creditworthy endorser. In essence, financially needy students who otherwise display potential will not be able to access graduate school in this new lending environment.
Graduate students who take out private education loans will also face higher interest rates and limited repayment options. The elimination of Grad PLUS Loans financially strains students who are not financially savvy, even if their earnings potential is immense with the graduate credential.
In this strategy, cash-strapped students who do not want to take out a private education loan will need to find other funding options to fill the gap. Other sources of capital students can tap into include employer benefits, scholarships and grants from institutional and private sources, and financial windfalls from their families. Tight-knit family units who desire success for each other will use intergenerational wealth or savings to finance educational studies for worthy family members. Students who do not come from these privileged backgrounds will have to find alternative sources of capital in their own environments.
Graduate schools have a unique dilemma in this new game. Without Grad PLUS Loans to juice revenue projections, many institutions now face budget constraints. As a credit crunch emerges in the educational loan market for graduate studies, graduate schools face two strategies:
The most logical response for most schools is to lower graduate tuition if it creates too many funding gaps for their student population. As of June 2026, most graduate schools are sticking with their planned tuition increases for the fall 2026 semester. That said, some schools will naturally revisit their graduate enrollment strategies for future academic years as realities set in with the elimination of the Grad PLUS Loan program. Tuition resets are one strategy schools can use to lower tuition to more reasonable levels, accounting for the financing limitations students now face.
Another strategy schools contend with in this environment is the creation of more innovative degree programs that allow students to earn credentials more quickly than through a traditional degree program path. Some schools are using one-year MBAs as a marketing tool to differentiate their programs’ costs and time to completion from those of their peers. As the graduate school market evolves, the introduction of other innovative strategies becomes increasingly paramount in the battle for differentiation. Many schools value diverse student bodies, so ensuring an accessible degree program exists despite the limitations of the loan market is something students can expect to see soon.
This strategy is straightforward. It steals from the undergraduate playbook. Schools with robust endowments that value graduate studies can enter the discounting game to entice students to enroll in their graduate programs. Scholarships have a psychological component that students value: they make students feel chosen by that school. It feels good to receive a scholarship or grant. Discounting allows schools to maintain higher tuition prices for full-pay students while enrolling financially needy students who have funding gaps. Some graduate schools already offer scholarships or grants to attract a diverse student body. Discounting is a feasible enrollment strategy for grad schools fretting about enrollment declines. The overarching strategy for schools involved in discounting is deciding whether to do so on a broad level (volume-based enrollment) or in a more selective manner (meeting funding gaps for financially needy students while making those who have the financial means to pay the full freight of tuition costs).
Discounts can always be discontinued when they are no longer viable or necessary. A discounting regimen also keeps a school’s existing tuition price intact, whereas a tuition reset fundamentally alters it for an extended period. Depending on a school’s endowment size and enrollment priorities, students should expect discounting to become more common over time as schools differentiate their grad programs in a variety of mechanisms (e.g., price, value, educational outcomes, etc.).
Enrollment drops at schools that cannot attract students to graduate school. Schools face budget constraints, including deficits that may necessitate cuts to faculty and degree programs.
Schools may do well financially but face the inherent risk of decreased enrollment.
Schools can anticipate more negotiations with prospective students as their bargaining power returns.
Universities improve their competitiveness for top-tier grad students by offering their best net-price tuition packages to the students they want most.
Students enjoy lower and more manageable levels of debt.
Our game theory exercise ends with unresolved questions. A potential flaw to the Bennett Hypothesis is that it does not account for the immense impact of labor costs on colleges and universities. While goods often become cheaper over time through innovations in manufacturing, labor-intensive industries do not have the same advantages. As salaries and benefits increase over time to attract and retain top-tier talent, it’s not entirely surprising that graduate tuition prices have exploded to cover these costs. Now, one must also ponder whether Grad PLUS Loans played an outsized role in pushing the inflationary spiral of graduate tuition prices to a level far beyond normal increases in expenses such as labor costs. It is hard to refute the evidence that Grad PLUS Loans had a role in inflating graduate tuition costs due to their uncapped and unrestrictive nature.
What will schools do for master’s programs that serve vital interests but have meager lifetime earnings? A good example of this predicament is mental health counselors and social workers. Both fields are growing to meet challenging societal needs that private interests fail to serve. Upskilling through a master’s degree helps these students complete the coursework required to sit for licensure or acquire advanced knowledge to serve society’s needs better. How should graduate schools account for this unique yet essential student population?
How powerful will private lenders become with colleges and universities? If a school participates in the preferred lenders list game, how much bargaining power will private lenders acquire over educational institutions? Do preferred lenders’ lists serve students’ needs or create a more restrictive lending environment?
What strategies will colleges and universities employ to attract diverse student bodies who have funding gaps? Will the elimination of Grad PLUS Loans herald a new era of lower tuition prices and competition among schools? Or will schools survive through higher prices and reduced enrollment?
The landscape of graduate education is changing rapidly as we enter the first academic year without Grad PLUS Loans. Time will tell which direction schools and students go in their choices. Based on the strategies outlined above, one can expect students to benefit over time from lower tuition prices and gift aid to offset tuition costs. Competition among schools will increase sharply as the need to recruit students with varying price sensitivities will weigh on enrollment objectives that meet the institution’s budget needs. Buckle up, it’s going to be a bumpy ride.
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