More college students will need to turn to private loans to pay for school - but 40% of Americans won't qualify, according to a new report

By Jillian Berman

Private student lenders are gearing up to fill the void left by the federal government. A new report indicates a large share of students could be left behind.

Changes to the federal student-loan program may have students looking to the private market to fund their education.

With the federal government set to pull back significantly from lending to students, private student lenders are gearing up to fill the void. But new research suggests a large swath of Americans won't be able to access the funding, putting their hopes of attending college or graduate school at risk.

Roughly 40% of Americans wouldn't qualify for most private student loans based on income and credit-score requirements alone, according to an analysis of underwriting criteria from 34 private student lenders carried out by Protect Borrowers, an advocacy group, and the Century Foundation, a left-leaning think tank. What's more, about 61% of students receiving a Pell grant - money the government provides to low-income students to attend college - wouldn't be eligible, the research found.

The analysis adds more fuel to concerns among higher-education leaders and consumer advocates about the impact of the changes to student lending from the 2025 Republican tax and spending bill. The law, which will be implemented this summer, caps - for the first time in decades- the amount that parents can borrow to pay for their kids' college and the amount graduate students can borrow.

The result, advocates and higher-education leaders worry, is that less wealthy students and families will be blocked from getting the financing they need to pay for college or will be forced to take on loans with worse terms and interest rates.

Allowing private lenders "to be the gatekeepers of who gets access to a higher education ... that's very troubling," said Aissa Canchola Bañez, the policy director at Protect Borrowers. "I have no doubt that the private market is ramping up because they see the opportunity to jump on prime borrowers. It's the people who need the most help who are going to fall behind."

Representatives from the private loan industry pushed back on the report's findings. Alex Ricci, the president of the National Council of Higher Education Resources, a trade group that represents private lenders as well as state-affiliated lending organizations, said the report appears to embody two conflicting arguments: that private loan debt is bad for students, and also that private lenders will leave low-income students worse off by not offering them loans.

Ricci said his organization's members "are doing their best to facilitate responsible access to life-changing education for students, including by reassessing how they evaluate creditworthiness in their loan programs." He added that federal policy changes require all stakeholders, including lenders, to re-evaluate their practices and programs.

Caps on loans for graduate students and parents for the first time in decades

Starting in July, graduate students attending professional programs, including for medicine, dentistry and veterinary medicine, will be able to borrow a maximum of $200,000 over the course of their degree. Loans for students in other graduate programs will be capped at $100,000. Parents taking out loans to pay for their kids' school will be able to borrow a maximum of $20,000 a year per child and $65,000 total per child.

That's a big change. Previously, the government allowed students and families to borrow up to the cost of attendance through these programs.

The Consumer Bankers Association estimated earlier this year that the private sector could underwrite student loans for at least 75% of graduate students who would have otherwise taken on more federal debt. Still, the organization, which represents some companies that make private student loans, acknowledged that some students could be left behind.

"Certain groups of students may still struggle to fully fund their tuition through private markets," the organization wrote in a recent report. "While these are precisely the students who will now be protected from excessive federal loans they could not repay, further steps should be considered to facilitate their access to advanced degrees."

The idea behind implementing the caps on parent and graduate loans was to eliminate what critics had said was essentially an unlimited source of funds for schools that gave them room to raise tuition.

In reality, it may be difficult for schools to bring their prices down in response to the caps, experts say. Meanwhile, other sources of funding are popping up to fill the void.

Private lenders are launching new products to capture the demand. Some schools are starting their own in-house lending programs and others are beefing up their lists of private lenders with which they have special deals. Some states with college loan programs are also looking at expanding their capacity.

In addition, a group of private lenders recently made a change that will more easily allow them to offer six-figure loans to students. Most private student lenders use the same back-end technology to communicate information about their loans between schools, servicers and other stakeholders. Until recently, that technology didn't have the ability to accommodate loans that were higher than five figures. Earlier this year, that changed.

The system dates back to the mid-1990s, and at that time, "you weren't getting a loan for $100,000," Ricci said.

"Well, it's 2026 and you might be going to a very high cost medical school and need to borrow $100,000," he added.

Ricci, whose organization was integral to the change, said they'd been talking about it for years, but the passage of last summer's Republican megabill put those efforts into "overdrive."

"If the federal government is going to pull back, whether we like it or not, more students are going to rely on private loans," he said.

Still, he said, he wishes it weren't the case that the organization had to make it easier for students to access more loans.

"I'm not thrilled that more students are relying on borrowing large loan amounts. That's still nobody's ideal," he said. "For some people, borrowing that amount might make sense. I want those people to get the money they need."

Addressing a market failure

The federal government first became involved in student lending to address a market failure. Young people looking to go to college generally didn't have credit or much money, but they did have potential - something the private market wasn't set up to invest in. When students borrow from the federal government, their family's income and credit history aren't relevant to whether they can get a loan.

Private lenders don't have the luxury of ignoring signs of creditworthiness when deciding whether to lend to students. That means that they often require a parent or another relative with more credit history to co-sign - and that students from families with limited means or poor credit history could wind up paying more for private loans.

Still, traditional underwriting criteria isn't exactly a good predictor of whether a college or graduate student will be able to repay their loans.

"Credit scores will cap the educational potential of many people who could otherwise become lawyers and doctors," said Peter Granville, a higher-education fellow at the Century Foundation. "Affluent families will be just fine. They will get the credit they need," he added, but the 40% who don't qualify will be left behind.

The Consumer Bankers Association says it wants the government to provide more clarity on whether private lenders can use information about a student's program of study to make credit decisions. Consumer advocates and some lawmakers have been wary of this approach because it may penalize students attending less wealthy schools, including historically Black colleges and universities, and further exacerbate gaps in access to higher education and affordable loan repayment.

In the past, market discipline hasn't always been enough to prevent private student lenders from partnering with schools with poor outcomes to offer arguably predatory loans often to low-income students. Advocates worry that the pullback in federal student lending could create more opportunity for that, and that borrowers who don't qualify for traditional private student loans could be steered toward even riskier products at a time when the Consumer Financial Protection Bureau has been weakened.

"If someone wanted to make a buck by luring students into bad loans, they've never had an easier time," Granville said.

-Jillian Berman

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