- Over 40% of Americans will be denied private student loans from traditional lenders based on credit and income underwriting requirements.
- Nearly two-thirds of Pell Grant recipients will not qualify for the vast majority of private student loans, meaning the students who need financial aid the most are the least likely to get it from private lenders.
- Private lenders like SoFi, Navient, and Sallie Mae are preparing for more loan applications, even though their underwriting standards won’t make them possible.
A new report from Protect Borrowers and the Century Foundation highlights a bigger concern: The private student loan market is potentially unable to serve the millions of Americans who would lose access to federal student loans under the One Big Beautiful Bill Act.
Report, Access Denied: How 40% of Americans are locked out of the private student loan marketAnalyzed the underwriting requirements of 34 commercial private student loan lenders and found that more than 40% of Americans would be locked out of the private market entirely.
The findings come at a time when private lenders are being positioned (by both Congress and the loan industry) as a solution for students who can no longer rely on federal loan programs.
But the data tells a different story: The private market is designed to serve borrowers who already have wealth, strong credit and high incomes. The doors are closing on everyone else.
What OBBBA changed for student loan borrowers
OBBBA created a new era in student lending. The legislation eliminated the Grad PLUS loan program entirely, and replaced it with new limits on Direct Graduate Loans that depend on whether the borrower is enrolled in a “graduate” or “professional” program.
The bill caps the Parent PLUS Loan at $20,000 annually and $65,000 per dependent student.
Notably, the bill makes no changes to graduate student loan borrowing limits, which have remained unchanged since 2008.
Result: Graduate students who previously relied on Graduate PLUS loans (which made up almost 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 over-represented among those affected by the new borrowing limits.
For parents, more than half of Parent Plus borrowers will need to borrow more than the new $20,000 annual limit. Specifically for Parent PLUS loans, OBBBA also removed access to income-driven repayment plans (and in turn, public service loan forgiveness), making them worse than private loans for many families.
Why can’t private lenders fill this gap?
College Investor previously reported on why private lenders can’t fill the loan gap left by federal lending changes, but this report sheds light on the latest data on why that’s the case.
Proponents of the federal debt ceiling 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 Avenue, Earnest, Nelnet Bank and Citizens Bank) found that their underwriting needs won’t cover a large portion of the population:
- Most lenders require a minimum credit score of at least 640, with the most common minimum being 670. The credit score requirement alone will exclude over 40% of potential borrowers from the vast majority of major, traditional lenders.
- Each lender in the study requires the borrower or co-signer to be “creditworthy.” This single requirement prevents 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 threshold set at $35,000. Based on income requirements alone, approximately 2 out of 3 Pell Grant recipients (61.1%) will be rejected by most private lenders.
- Between 61% and 100% of lenders in the sample are co-signers, reflecting the heavy reliance of the private market on household wealth and family financial stability. This aligns with a Previous CFPB study shows 90% of private graduate loans require cosigners.
- Nearly 82% of nonprofit student loan lenders (18 out of 22) and more than half of all lenders studied are restricted by state residency requirements, making it even more limited who can access their products.
The researchers say their estimates are conservative. The analysis only considers credit score and income requirements. It does not take into account debt-to-income ratio, length of employment, residency restrictions, availability of a co-signer, or many other factors that lenders evaluate.
The actual exclusion rate is likely to be higher.
Who gets hurt: Low-income families and students of color
The burden of these exclusions falls disproportionately on students of color and low-income families.
Overall, 38.2% of Americans have bad credit, according to the report, but that figure is 62.2% for people living in majority black neighborhoods, 61.1% in majority Native American neighborhoods and 48.1% in majority Hispanic neighborhoods.
Students in the lowest income quartile are the least likely to take out private student loans, but they also face the highest rates of economic hardship due to non-repayment. 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 those borrowers who manage to pass the minimum underwriting cutoff, the news is still grim.
Private student loan interest rates can be up to 23% higher than the fixed federal rates of 6.39% for undergraduate students and 7.94% for graduate students.
Private loans also lack federal protections such as income-driven repayment plans, Public Service Loan Forgiveness eligibility, hardship-based forbearance, and loan cancellation in cases of death, disability or school closure.
The growing “shadow student loan” market
Students who cannot obtain loans from major, traditional lenders may not be able to afford the money they need for school. Many will be pushed toward the growing “shadow student loan” market – a loosely regulated ecosystem of subprime lenders, personal loans, “buy now, pay later” products and specialized loans tied to higher education.
As of 2020, the size of this market was at least $5 billion and growing.
Shadow student loan products have interest rates that can exceed 35%, along with exorbitant origination and processing fees (up to $300 per loan), deceptive marketing, and aggressive debt collection practices that often violate consumer protection laws.
These lenders grew in number to finance for-profit colleges after the 2008 financial crisis and are again profitable as more borrowers turn away from federal and traditional private lending.
Even the cost of tuition payment plans can sometimes exceed that of federal student loans.
What families need to know
Students who forgo a bachelor’s degree could 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 positive returns on investment only help if you’re not paying off large sums in student loans. Borrowing excessive amounts of money – especially private student loans – can suddenly make the value proposition negative.
The risks to individual households and the broader economy from these reforms going into effect are enormous.
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