Risky lending products could expand as federal student-loan repayment changes begin to roll out, a new report says.
On Tuesday, advocacy group Protect Borrowers and left-leaning think-tank The Century Foundation released a report on how the private student-loan industry will shift once President Donald Trump’s federal repayment overhaul is implemented.
The report found that 40% of Americans would be denied private student loans from traditional, prime lenders due to low credit. It could drive them to consider the “shadow” student debt market, which is made up of subprime lenders, including personal loans, debt owed directly to schools, and “Buy Now, Pay Later” products, all of which can come with high interest rates and aggressive debt collection.
Those products could get a boost from Trump’s “big beautiful” spending legislation, which included new caps on borrowing for advanced degrees. Previously, students could borrow up to the full cost of attendance through federal student loans. Under the new caps, programs with higher tuition could push borrowers to seek private financing or forgo those programs altogether.
Jennifer Zhang, Protect Borrowers’ policy, research, and data analyst, told Business Insider that traditional private lending limits will “hurt the people who arguably would stand to gain the most from the federal student loan program” because students from low-income backgrounds and students of color often have limited access to credit.
“The pivot toward private lending is going to deprive students of access to college and to make their choice,” Zhang said. “Either you can give up on the dream of higher education, or try to look for lenders that are increasingly predatory and offer highly predatory and expensive loans to people who are the most desperate.”
During negotiations on Trump’s spending legislation, the Department of Education said that borrowing caps for advanced degrees would prevent borrowers from taking on unaffordable debt, and could push colleges to lower tuition. Major private lenders have said they’re prepared for an influx of federal borrowers; Jonathan Witter, CEO of Sallie Mae, said during a January earnings call that he’s “excited about the opportunity created by the recent federal student lending reforms.”
Some of those lenders also told Democratic lawmakers in February that, in anticipation of the influx, they’re committed to offering borrower protections. Sallie Mae said that its customers face “the highest periods of repayment stress” in their first 12-24 months of repayment, and it offers grace periods for those borrowers. SoFi, another major private lender, said it has “many options,” like grace periods and deferments, to help its borrowers avoid delinquency.
In a time when oversight over private student loans is diminished — including staff cuts at the Consumer Financial Protection Bureau, which brought enforcement actions against the industry — Zhang said the repayment changes are even more “dangerous.”
“The transition toward increased private lending is going to happen in a context where lenders know that the CFPB and the Department of Education are really not doing their jobs and looking for the lenders who are breaking the law,” Zhang said.
A shifting student-loan repayment landscape
With oversight lacking, the report had recommendations to protect borrowers from risky lending products. One is to require private student-loan companies to register with their state financial regulator, which would allow the state access to information on the lender’s performance and portfolio. Only eight states have passed legislation requiring private lenders to register with states, the report said.
The report also called for more federal and state funding toward higher education to prevent borrowers from relying on debt-based systems.
For now, the private student-loan industry could see increased demand. The Department of Education will begin implementing the repayment changes on July 1, including new income-driven repayment plans, and borrowers previously told Business Insider that they’re bracing for higher monthly payments.
At the same time, the department will transition more than 7 million borrowers off of the SAVE student-loan repayment plan this summer, after a recent settlement to end the program early. SAVE would have been phased out in 2028 — now, millions of federal borrowers will be navigating a new repayment system, and some might turn to the private market.
A group of Democratic lawmakers led by Sen. Elizabeth Warren released an analysis in January calling for increased oversight over the industry due to the looming repayment changes.
They wrote that private lenders preparing for an influx of federal borrowers “underscore an urgent need for oversight of the private lending market as these companies prepare to cash in on the Administration’s agenda.”