As the federal government reduces lending options for graduate education, more students are turning to state-based loans to cover costs. Experts advise borrowers to carefully review the terms of these loans, which resemble private loans more than federal ones. Connecticut and Minnesota have expanded graduate loan offerings this year following the Trump administration's phase-out of Grad PLUS loans for new borrowers and the imposition of borrowing caps. Approximately two dozen state student loan lenders now provide assistance to help students fill funding gaps, with states like Massachusetts, Arkansas, and New Jersey having offered loan programs for decades.
Rajeev Darolia, a professor of public policy at the University of Kentucky, noted that state loans exist "sort of in the middle" between federal and private loans, potentially offering more favorable terms. However, these loans typically lack the protections associated with federal loans, such as forgiveness and income-driven repayment plans. Betsy Mayotte, president and founder of The Institute for Student Loan Advisors, described state loans as "essentially private loans, just a different flavor," and emphasized that while some may offer better terms, this is not universally true.
Federal lending constitutes about 90% of student lending in the U.S., providing benefits like subsidized interest rates and flexible repayment plans. In contrast, private lenders assess risk and may require co-signers or charge higher rates based on creditworthiness. Some states have been offering student loan options since the early 1980s, with Massachusetts creating the Massachusetts Educational Financing Authority (MEFA) in 1982 to provide low-cost loans after federal aid reductions.
Following the Trump administration's changes in 2025, MEFA began developing graduate loan options to address funding gaps. Tom Graf, MEFA's executive director, acknowledged the limitations of state programs in fully covering the financial needs of graduate students. Andrew Smalley, a senior policy specialist in education at the National Conference of State Legislatures, noted that states are reassessing their loan offerings in response to federal changes.
State loan options vary widely, including eligibility rules, borrowing limits, interest rates, and repayment plans. Some states offer forgivable loans contingent on working in specific professions. Sophie Laing, a legal aid attorney and author of a report by Protect Borrowers, highlighted numerous complaints about state loans, indicating that borrower experiences have been overlooked in discussions about student loans.
Laing pointed out that state loans can have significant drawbacks compared to federal and private loans, including wage garnishment and tax offsets. Unlike federal loans, which are broadly available, state loans may use creditworthiness for eligibility, potentially excluding lower-income borrowers. Additionally, state loans are often funded by bondholders, which may lead to higher interest rates.
Some state programs do provide options not typically available from private lenders, such as modified repayment plans. MEFA, for instance, offers interest-only payment plans in certain circumstances. While some state loans may be accessible to out-of-state students, others are restricted to residents or in-state attendees.
Experts recommend that students exhaust all federal loan options before considering state, private, or institutional loans. MEFA encourages new borrowers to prioritize federal loans first. In summary, Mayotte advised, "A loan is a loan is a loan," stressing the importance of understanding the terms and conditions of any loan taken.