Private student loan market set to expand under new federal loan caps

More graduate students are likely to take out private education loans after new federal loan caps were established in President Donald Trump’s One Big Beautiful Bill Act.

That prospect is worrying, consumer advocates and other financial experts say — private lenders are likely to reject many student applicants because of their credit scores or income, and those who are approved could face more expensive borrowing terms.

“We cannot assume the private market will step in to fill federal loan gaps,” said Carolina Rodriguez, director of the Education Debt Consumer Assistance Program in New York. “That reality will directly impact who can afford to enter critical professions.”

The legislation passed in July eliminates the Grad PLUS federal loan program, which allowed graduate students to borrow up to the entire cost of their degree. Starting July 1, for most degrees, graduate students will be able to borrow only $20,500 per year, and up to $50,000 per year for professional degrees, such as dentistry and law, according to rules finalized by the Education Department on Thursday.

The Trump administration said in January that the unrestricted borrowing led to “steep increases in graduate school tuition.”

“I estimate that private student loan volume may double due to the loan limit changes,” said higher education expert Mark Kantrowitz. Currently, students borrow roughly $10 billion a year in private student loans, Kantrowitz said.

Several lenders, including Navient and SoFi, have already disclosed in letters to Congress that they are preparing for a greater demand for private student loans.

“We’re concerned that the loans will be expensive and higher risk for borrowers,” said Anna Anderson, a staff attorney at the National Consumer Law Center.

More than 40% of Americans would likely be denied most private student loans from “traditional, prime lenders,” due to credit and income underwriting requirements, according to an analysis published in March by Protect Borrowers, a consumer advocacy group, and The Century Foundation. It analyzed the borrowing criteria of 38 private student lenders.

Many lenders required a minimum credit score of 670 and an income of $35,000, the organization found. That may be a difficult threshold for many young people who have just finished their undergraduate degree to meet. The average credit score for those in their 20s is 662, according to one analysis by Chase.

“Private student loans are credit-underwritten,” Kantrowitz said. “This is in contrast with federal loans, where the focus is more on college access than profitability.”

If grad students can’t borrow to meet the cost of attendance, some will enroll in lower-cost colleges while others will discontinue their education altogether, he said.

“The private loan market focuses on careful underwriting, and also will be innovating and working with regulators to find ways to address funding needs for more students who are going to programs that actually position them for long-term financial success,” said Scott Buchanan, executive director of the Student Loan Servicing Alliance, a trade group for federal and private student loan servicers.

Borrowers who move to the private student loan market are likely to face high interest rates, which can make repayment more difficult. Interest rates on federal student loans currently range from 6.39% to 8.94%. For comparison, private student loans can come with interest rates as high as 23%, according to NerdWallet.

“Any time you see an interest rate that high, it’s going to be much harder to pay off that debt,” Anderson said.

Kantrowitz provided an example: A $10,000 private loan at 16% interest would result in a $147 monthly payment over 15 years. The federal student loan equivalent would lead to a $96 monthly payment. While the borrower with private loans would pay a total of $26,437, the federal loan holder would pay $17,201.

While the interest rates on federal student loans are fixed, many private student loans have variable rates that fluctuate over time, said Nancy Nierman, assistant director at EDCAP. This can make repayment unpredictable, Nierman said.

“This is what we saw with interest rates bottoming out at the beginning of Covid, then rising sharply in 2022 and 2023 as inflationary pressures took hold,” she said. “Borrowers who started with rates on private loans at 3%, two years later, were struggling to make payments as rates increased into double-digit territory.”

The U.S. Department of Education offers income-based repayment plans and forgives the federal student debt of borrowers who become permanently disabled or can prove they were defrauded by their schools. Federal student loans also die with the borrower.

In contrast, student loan forgiveness by private lenders is extremely rare. Only about half of private lenders discharge a borrower’s debt when they become disabled or die, according to Kantrowitz.

Otherwise, that debt can be passed to a cosigner, and if they have one, to their estate, said certified financial planner Douglas Boneparth, president and founder of Bone Fide Wealth, a wealth management firm in New York City.

“Co-signed debt doesn’t disappear at death in most cases,” Boneparth said. “It becomes a claim against the estate, which can shrink what passes to heirs.”

But many private student loans are subject to a statute of limitations, or a maximum amount of time during which your lender can sue you for defaulting, said Kate Wood, a lending expert at NerdWallet. In contrast, collection on federal student loans has no time limit.

“On the short side, you’ve got states with a three-year limit, like Maryland and North Carolina,” Wood said. “The high end is Kentucky — 15 years, though there are some states with 10-year limits.”

Private student loans provide funding unavailable through federal programs, said Catherine Fitzgerald, senior director of communications, marketing and community outreach at Navient. She said the lender publishes “clear eligibility criteria” and offers multiple repayment options.

“This year, we introduced automatic co-signer release and eliminated minimum income requirements — steps intentionally aimed at helping qualified students address unmet funding needs while maintaining prudent credit standards,” Fitzgerald said in an email.

The Consumer Financial Protection Bureau reached a $120 million settlement with Navient in 2024, after accusing the lender of steering student loan borrowers away from affordable repayment plans and into expensive forbearances. Navient disputes the CFPB’s allegations but, as part of the settlement, was permanently banned from handling federal student loans.

“I would see a co-signer requirement for almost every single borrower,” Anderson said, from when she worked with private student loan borrowers between 2015 and 2022.

That means the rise in private student loan borrowing could leave a surge of parents and grandparents indebted, as well, if the student borrower can’t keep up with payments, financial advisors say. These agreements have historically been next to impossible to get out of: The CFPB found in 2015 that private student lenders rejected 90% of co-signer release applications.

“A grandparent co-signing in their 70s is taking on a 10- to 15-year obligation that may outlive their working income entirely,” said Boneparth, a member of CNBC’s Financial Advisor Council.

“If the loan defaults, the lender can come after the parent or grandparent’s wages, tax refunds and in some states, even Social Security garnishment risk exists,” he said. “That’s retirement income in the crosshairs.”