States File Legal Challenge Over New Student Loan Limits

More than two dozen states filed a legal challenge last week against the Education Department over new regulations that will impose severe limits on new student loan disbursements going forward.

“You should not have to be wealthy to serve your community as a nurse, physical therapist, or physician assistant,” said New York Attorney General Letitia James in a statement last week. New York is one of at least 24 states that filed a joint lawsuit. “Higher education is expensive, and our health care system is already under immense strain. This rule will shut talented people out of critical professions and leave communities with fewer health care providers they desperately need. We cannot afford fewer nurses, fewer providers, or fewer opportunities for working people to enter these essential fields.”

Here’s what the lawsuit is about, and what student loan borrowers should know about the new limits.

New rules impose strict student loan limits

In April, the Education Department released final rules to implement the One Big Beautiful Bill Act, Republican-led legislation signed by President Trump last year that will transform federal student loan disbursement and repayment. The new regulations, which are set to go into effect on July 1, will fundamentally change how college students, graduate students and their families will pay for higher education.

“Beginning this summer, the Department will implement commonsense loan limits on how much students and parents can borrow,” said the Education Department in a statement last month accompanying the release of the final regulations. “The Department’s final rule will carry out the Act's sweeping higher education reforms to support student borrowers and improve the health of the federal student lending system.”

“The amended regulations cap federal student loan borrowing for both graduate and professional students, as well as cap loans for parents who borrow on behalf of dependent undergraduates,” summarized the department in a related fact sheet. “Beginning on or after July 1, 2026, Graduate student loans are capped annually at $20,500, with an aggregate cap of $100,000; Professional student loans are capped annually at $50,000, with an aggregate cap of $200,000; For the first time, Parent PLUS borrowers are capped annually at $20,000, with an aggregate cap of $65,000 per dependent.”

“All borrowers who receive a loan made on or after July 1, 2026, are subject to an aggregate lifetime loan limit of $257,500,” said the department, although the fact sheet notes there will be some limited interim exceptions for certain borrowers who are “enrolled in a program before July 1, 2026, and who have already received a loan for that program.”

States argue new student loan limits are arbitrary and harmful

But a broad coalition of states filed suit last week against the department, arguing that the new student loan limits are harmful and unlawful, and exceed what Congress authorized in the One Big Beautiful Bill Act. 

The ‘graduate' vs. ‘professional' degree distinction

The states particularly called out distinctions between how the department characterized “graduate” degree programs (which will have lower borrowing caps) and “professional” degree programs (which will have higher borrowing caps) as arbitrary. The department characterized nursing programs in the new regulations, for example, as a “graduate” degree program, subjecting nursing programs to lower federal student loan borrowing caps. Health care advocacy groups have warned that these caps will limit the ability of prospective students to pay for a nursing degree, which may worsen an existing nationwide care shortage. 

“The coalition argues the rule could harm states by reducing revenue for public institutions of higher education, creating barriers for students pursuing advanced training, and worsening workforce shortages in critical professions,” explained the Maryland Office of Attorney General in a statement last week. “For example, the University of Maryland School of Nursing in Baltimore offers an entry-level Master of Science in Nursing degree that the Final Rule improperly refuses to classify as ‘professional.’ Under the Department’s definition, a graduate nursing student could only borrow up to $20,500 per year for that program in federal student loans, $29,500 less than if the degree were correctly classified as professional. Some students will struggle to borrow funds through private loans to cover the gap.”

How the rule exceeds what Congress intended

The states, in their complaint, argued that the department’s severe restrictions in the new regulations go far beyond what Congress intended in the One Big Beautiful Bill Act.

“On May 1, 2026, the Department of Education (“Department”) promulgated a new Final Rule… effective July 1, 2026, which alters the definition of ‘professional degree’ that Congress adopted,” reads the complaint. “The Final Rule narrows the definition incorporated into H.R. 1 and effectively makes the illustrative list of degrees exclusive, thereby excluding many healthcare and other professional degrees that would otherwise be eligible for the higher limits. Congress never intended anything of the sort. The Rule’s definition of ‘professional degree’ directly contravenes H.R. 1 and is thus contrary to law.”

The states argue that the department’s new student loan limits “arbitrarily relied on several factors Congress did not intend it to consider—such as whether professionals are subject to supervision and the ‘historical context’ of the Department’s regulation—and its application of those factors is inconsistent and contradictory.”

New rules also change student loan repayment

The Education Department’s new regulations also make significant changes to student loan repayment, as well. Anyone who takes out new federal student loans, or consolidates their existing federal student loans, on or after July 1 of this year will lose access to all current repayment plan options, and will only be able to enroll in either a new Tiered Standard plan or the Repayment Assistance Plan (RAP), a new income-driven plan that requires 30 years of payments before a borrower can qualify for student loan forgiveness.

The new Tiered Standard plan

“The Tiered Standard plan will be the only fixed repayment option available to borrowers who receive a Direct Loan on or after July 1, 2026,” summarized the Education Department in the fact sheet accompanying the final regulations. “It provides fixed monthly payments over a period ranging from 10 to 25 years, based on the borrower’s outstanding principal balance (10 years for less than $25,000; 15 years for $25,000-$49,999; 20 years for $50,000-$99,999; and 25 years for $100,000 or more). This structure gives borrowers with higher loan balances more time to repay. In addition, monthly payments are set at a minimum of $50, helping borrowers make progress toward reducing their balance.”

The Repayment Assistance Plan (RAP)

“The RAP, a new income-based repayment option, is designed to benefit borrowers by allowing their payments to adjust based on income and family size, meaning borrowers pay more during years when their income is higher and less during years that their income is lower,” continued the department. “Under RAP, some borrowers will see reduced monthly payments compared to existing income-driven repayment plans. The plan also waives unpaid interest for borrowers who make on-time payments that do not fully cover accruing interest.”

Advocacy groups, however, have been critical of RAP’s lengthy repayment term. And the department clarified in the finalized version of the regulations released last month that payments made under RAP will not count toward student loan forgiveness under the Income-Based Repayment (IBR) plan, the only income-driven repayment plan that is ultimately preserved under the One Big Beautiful Bill Act and the accompanying regulations for current borrowers. The two dozen states challenging the new student loan limits under the regulations are not challenging the changes to federal student loan repayment plans.