In a significant legal setback for the Trump administration's student loan reforms, a federal judge in Washington has temporarily halted the Education Department's tighter definition of professional degrees. The ruling, issued just days before new loan caps were set to take effect on July 1, preserves the existing three-part test for determining which graduate programs qualify for higher federal loan limits.
Under the 2025 law, graduate students face a $20,500 annual cap with a $100,000 lifetime limit, while professional students can borrow up to $50,000 per year with a $200,000 lifetime ceiling. The Education Department had sought to narrow the professional degree category, which would have forced many high-cost programs to shift students into lower federal loan tiers, creating a financing gap that private lenders could fill.
U.S. District Judge Beryl Howell ruled that the department likely exceeded its authority under the statute, writing that “Congress removed any discretionary authority the Department may have had to narrow the definition.” The court granted a preliminary injunction, reinstating the previous criteria that allow programs such as physician assistant and advanced practice nursing to retain their professional classification.
For borrowers in qualifying programs, the difference is substantial: they can now access up to $50,000 annually in federal Direct Unsubsidized Loans instead of $20,500, with the lifetime cap rising to $200,000 from $100,000. This means private lenders could lose up to $100,000 per borrower in potential loan volume that would have bridged the gap left by tighter federal limits.
The ruling casts a shadow over the growth narratives of major private student lenders. Sallie Mae (NASDAQ:SLM) reported first-quarter private education loan originations of approximately $2.9 billion, up 5% year over year, with graduate loan originations climbing 14%. CEO Jon Witter had previously told investors that the company expected “multi-year growth” from the federal reforms, with originations potentially rising as much as 70% over several years.
SoFi Technologies (NASDAQ:SOFI) also posted strong results, with record first-quarter student loan volume of $2.6 billion, up 119% year on year, and an annualized charge-off rate dropping to 65 basis points. CEO Anthony Noto highlighted the health of the company's consumer base. However, the court order now introduces significant uncertainty into these growth trajectories.
Private lenders are not entirely excluded from the market. Grad PLUS loans, which allow graduate students to borrow for their full cost of attendance, are still scheduled to end for new borrowers. Judge Howell noted that students needing more than the capped federal loans offer “must turn to private loans,” which often come with stricter terms and no access to federal public service loan forgiveness. Yet the immediate demand for private loans may not translate into approved volume, as Sallie Mae's first-quarter in-school originations carried an average FICO score of 754, with 95% requiring a co-signer—a barrier for many students.
The legal battle is far from over. The Education Department is reviewing the order and has stated it will take “appropriate action,” maintaining that the caps are intended to pressure schools to control costs. A separate lawsuit from Democratic-led states over the loan caps remains pending. Advocacy groups representing advanced practice nursing and physician assistant education, among the plaintiffs, welcomed the ruling. Skye Perryman of Democracy Forward, which represented the plaintiffs, said the federal government should support students entering these vital health fields, “not creating barriers to vital support.”
Market participants will be watching closely as the case progresses, with potential implications for the $1.6 trillion student loan market and the competitive landscape for private lenders. The ruling temporarily preserves the status quo, but the ultimate outcome remains uncertain, leaving investors to reassess the growth assumptions built into Sallie Mae and SoFi's valuations.
