- More than 40% of Americans are likely to be denied private student loans from traditional lenders based on credit and income underwriting requirements.
- Nearly two-thirds of Pell Grant recipients would not qualify for the vast majority of private student loans, meaning students who need financial aid the most are the least likely to get it from private lenders.
- Private lenders such as SoFi, Navient and Sallie Mae are bracing for more loan applications, even though their underwriting standards likely won’t make it possible.
A new report from Protect Borrowers and The Century Foundation highlights a major concern: that the private student loan market is likely unable to serve the millions of Americans who will lose access to federal student loans under the One Big Beautiful Bill Act.
report, Access Denied: How 40% of Americans Are Excluded from the Private Student Loan Marketanalyzed the underwriting requirements of 34 private commercial student loan lenders and found that more than 40% of Americans are likely to be excluded from the private market altogether.
These findings come at a time when private lenders are positioned (by Congress and the lending industry itself) as a solution for students who can no longer rely on federal loan programs.
But the data tells a different story: The private sector market was built to serve borrowers who already had wealth, strong credit, and a high income. For everyone, the doors are closed.
What has OBBBA changed for student loan borrowers?
OBBBA created a new era in student loan lending. The law eliminated the Grad PLUS loan program entirely, replacing it with new maximum limits on direct graduate loans depending on whether the borrower was enrolled in a “graduate” or “professional” program.
The bill also caps Parent PLUS loans at $20,000 per year and $65,000 per student with a dependent.
Notably, the bill did not change borrowing limits on college student loans, which have remained unchanged since 2008.
Result: Graduate students who previously relied on Graduate PLUS loans (which make up nearly half (47%) of a typical graduate student loan package) may now need to take on an additional $31,809 in private graduate student loan debt each year, and pay an estimated $10,885 in additional interest.
Black students and former Pell Grant recipients are overrepresented among those reaching the new borrowing limits.
For parents, more than half of Parent PLUS borrowers will likely need to borrow more than the new $20,000 annual cap. For Parent PLUS loans in particular, OBBBA also eliminated access to income-based repayment plans (and thus public service loan forgiveness), effectively making them worse than private loans for many families.
Why can’t private lenders fill this gap?
College Investor has previously covered why private lenders can’t fill loan gaps left by federal loan changes, but this report delves into the latest data on why.
Proponents of capping federal loans have long claimed that the private market would pick up the slack.
But the report’s analysis of 34 banks (including major names like Sallie Mae, SoFi, College Ave, Earnest, Nelnet Bank, and Citizens Bank) found that their underwriting requirements would exclude a significant portion of the population:
- The majority of lenders require a minimum credit score of at least 640, with the most common minimum at 670. The credit score requirements alone will exclude over 40% of potential borrowers from the vast majority of traditional prime lenders.
- Each lender in the study required the borrower or cosigner to be “creditworthy.” This single requirement prevents more than 1 in 4 Americans (25.7%) from qualifying for practically any private student loan.
- The average minimum household income requirement was $30,000, with the most common minimum set at $35,000. Based on income requirements alone, nearly 2 in 3 Pell Grant recipients (61.1%) will be rejected by most private lenders.
- Between 61% and 100% of loans originated by lenders in the sample have co-signers, demonstrating the private market’s high dependence on household wealth and household financial stability. This is consistent with A A previous CFPB study showed that 90% of private college loans require co-signers.
- About 82% of nonprofit student loan lenders (18 out of 22) and more than half of all lenders studied are restricted by government residency requirements, further restricting who can access their products.
The researchers point out that their estimates are conservative. The analysis only takes into account credit score and income requirements. It does not take into account debt-to-income ratios, length of employment, residency restrictions, availability of cosigners, or the many other factors that lenders weigh.
The true exclusion rate is likely to be higher.
Who’s hurting: Low-income families and students of color
The burden of these exclusions falls disproportionately on students of color and low-income families.
According to the report, 38.2% of Americans overall have poor to fair credit, but that number jumps to 62.2% for those living in majority-Black neighborhoods, 61.1% in majority-Native American neighborhoods, and 48.1% in majority-Latino neighborhoods.
Students in the lowest income quartile are the least likely to have private student loans, but they also face the highest rates of economic hardship leading to nonpayment. Black borrowers, of whom only 7.5% use private student loans (compared to 17% of white borrowers), are 26.5% likely to be unable to repay due to hardship — compared to 6.7% for white borrowers.
For borrowers who have managed to exceed the minimum underwriting cutoff, the news remains bleak.
Interest rates on private student loans can be as high as 23%, compared to the flat federal rates of 6.39% for undergraduates and 7.94% for graduate students.
Private loans also lack federal protections such as income-based repayment plans, Public Service Loan Forgiveness eligibility, hardship-based deferrals, and loan cancellation in cases of death, disability, or school closure.
The growing “shadow student debt” market
Students who cannot obtain loans from major traditional lenders will simply stop needing money to study. Many of them will be pushed into the growing “shadow student debt” market — an unregulated ecosystem of mortgage lenders, personal loans, “buy now, pay later” products, and specialized credit associated with higher education.
This market is at least $5 billion as of 2020 and growing.
Shadow student debt products carry interest rates that can exceed 35% along with excessive origination and processing fees (up to $300 per loan), misleading marketing, and aggressive debt collection practices that often violate consumer protection laws.
These lenders proliferated after the 2008 financial crisis to finance for-profit colleges, and are positioned to profit again as more borrowers are excluded from federal and traditional private lending.
Even tuition repayment plans can sometimes cost more than federal student loans.
What families should know
Students who forgo a bachelor’s degree would lose $1.2 million in potential lifetime earnings, while those who forgo a master’s degree or higher could lose an additional $400,000.
But this positive return on investment only helps if you’re not paying a fortune in student loans. Borrowing an excessive amount — especially private student loans — can suddenly make your value proposition negative.
The risks facing individual households and the broader economy are enormous as these reforms take effect.
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