Why Private Student Loans Won’t Fill OBBBA Funding Gap
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 millions of Americans who will lose access to federal student loans under the One Big Beautiful Bill Act.
The report, Access Denied: How 40% of Americans Are Locked Out of the Private Student Loan Market, analyzed the underwriting requirements of 34 commercial private student loan lenders and found that more than 40% of Americans would likely be shut out of the private market entirely.
The findings land at a moment when private lenders are being positioned (by both Congress and the lending industry itself) as the solution for students who can no longer rely on federal loan programs.
But the data tells a different story: the private market is built to serve borrowers who already have wealth, strong credit, and high incomes. For everyone else, the doors are closing.
The OBBBA created a new era in student loan lending. The law eliminated the Grad PLUS loan program entirely, and replaced it with new caps on Direct Graduate Loans depending on whether a borrower enrolled in a “graduate” or “professional” program.
The bill also capped Parent PLUS loans at $20,000 annually and $65,000 per dependent student.
Notably, the bill did not change undergraduate student loan borrowing limits, which have remain unchanged since 2008.
The result: graduate students who previously depended on Graduate PLUS loans (which made up nearly half (47%) of a typical graduate student’s loan package) may now need to take out an additional $31,809 in private graduate student loan debt each year, paying an estimated $10,885 in additional interest.
Black students and former Pell Grant recipients are overrepresented among those hitting the new borrowing caps.
For parents, upwards of half of Parent PLUS borrowers will likely need to borrow more than the new $20,000 annual cap. For Parent PLUS loans in particular, the OBBBA also removed access to income-driven repayment plans (and in turn, Public Service Loan Forgiveness), making them effectively worse than private loans for many families.
The College Investor previously covered why private lenders can’t fill the loan gaps left by the federal loan changes, but this report dives into the latest data as to why.
Proponents of federal loan caps have long argued that the private market would pick up the slack.
But the report’s analysis of 34 lenders (including major names like Sallie Mae, SoFi, College Ave, Earnest, Nelnet Bank, and Citizens Bank) found that their underwriting requirements would exclude a substantial share of the population:
The researchers note that their estimates are conservative. The analysis only considers credit score and income requirements. It does not account for debt-to-income ratios, employment length, residency restrictions, cosigner availability, or the many other factors lenders weigh.
The true exclusion rate is likely higher.
The burden of these exclusions falls disproportionately on students of color and families with lower incomes.
According to the report, 38.2% of Americans overall have poor to fair credit, but that figure jumps to 62.2% for those living in majority Black neighborhoods, 61.1% in majority Native American neighborhoods, and 48.1% in majority Hispanic neighborhoods.
Students in the bottom income quartile are the least likely to take out private student loans, but they also face the highest rates of economic hardship leading to non-repayment. Black borrowers, of which 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 do manage to scrape past minimum underwriting cutoffs, the news is still grim.
Private student loan interest rates can run as high as 23%, compared to fixed federal rates of 6.39% for undergraduates and 7.94% for graduate students.
Private loans also lack federal protections like income-driven repayment plans, Public Service Loan Forgiveness eligibility, hardship-based deferments, and loan cancellation in cases of death, disability, or school closure.
Students who cannot obtain loans from prime, traditional lenders will not simply stop needing money for school. Many will be pushed toward the growing “shadow student debt” market — a loosely regulated ecosystem of subprime lenders, personal loans, “Buy Now, Pay Later” products, and specialty credit tied to higher education.
This market had a size of at least $5 billion as of 2020 and has been growing.
Shadow student debt products carry interest rates that can exceed 35% along with excessive origination and processing fees (as high as $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 shut out of both federal and traditional private lending.
Even tuition payment plans can sometimes cost more than federal student loans.
Students who forgo a bachelor’s degree stand to lose out on $1.2 million in potential lifetime earnings, while those who give up on a master’s degree or higher could lose an additional $400,000.
But that 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 the value proposition negative.
The stakes for individual families and the broader economy are enormous as these reforms take effect.
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