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Robert Kelchen
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Robert Kelchen's national study of business, medical, and law schools found no evidence that unlimited federal loans caused those programs to raise prices.
Robert Kelchen estimated it can take $1 million of institutional resources to produce a single medical degree, meaning loan caps cannot easily reduce those costs.
The Department of Education's plan to reduce the burden of college is to lend students less money. Starting July 1, 2026, federal graduate loans are capped at roughly $21,000 per year for most programs. The bet: if students can't borrow more, schools will have no choice but to charge less.
The net price of four-year undergraduate programs has been essentially flat for about a decade. Sticker prices keep climbing, but financial aid and scholarships mean most families pay far less than advertised. The real runaway cost story is in graduate school.
For 20 years, the Bennett Hypothesis was untestable. Then in 2006, Congress created the Grad PLUS Loan program, giving graduate students access to unlimited federal borrowing. That policy created the natural experiment economists needed to determine whether easy money actually inflates tuition.
On February 18, 1987, Education Secretary William Bennett published 'Our Greedy Colleges' in the New York Times. He argued that federal student aid gives colleges a blank check to raise prices. Economists named the idea the Bennett Hypothesis — and it became the intellectual foundation for today's loan cap policy.
A study of Texas graduate programs found that when federal Grad PLUS loans allowed unlimited borrowing in 2006, schools raised prices by 64 cents for every extra dollar students received. The researchers call it causal. This is the study that Republican policymakers cite most often to justify loan caps.
Robert Kelchen studied business, medical, and law schools nationally and found no evidence of the Bennett Hypothesis. His reason: programs like medicine aren't profit centers — it costs up to $1 million to produce one medical degree. Schools can't easily cut prices because they're not inflated to begin with.
Most grad students already borrow within the new $21,000 annual limit, so only about 30% will be directly affected. But those who are affected tend to attend high-cost, name-brand institutions. A Pew analysis found NYU and USC top the list of schools with the most affected borrowers.
When unlimited federal grad loans launched in 2006, students abandoned the private loan market en masse. Now that private industry has shrunk, lower-income borrowers with limited credit histories may find it nearly impossible to get private loans to fill the federal funding gap.
Beyond loan caps, the Republican 'One Big Beautiful Bill' includes a 'do no harm' provision: any college program whose graduates don't out-earn a typical high school graduate loses federal loan access entirely. Cory Turner calls it a death sentence for low-return programs.
The Trump administration's loan cap strategy is a game of chicken with colleges: lower your prices or watch your enrollment shrink. The problem is that students — not administrators — are the ones forced to make the hard choices while the standoff plays out.
When you cap federal student aid without providing equivalent grants or scholarships, the most consistent finding in the research is not that students find cheaper schools — they just stop enrolling. Dominique Baker says this pattern holds across the literature and is likely to apply to grad students too.
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