Key Points
- Over 40% of Americans would likely be denied private student loans from traditional lenders based on credit and income underwriting requirements.
- Nearly two-thirds of Pell Grant recipients would not qualify for the vast majority of private student loans, meaning the students who need financial help 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 as their underwriting standards will likely not make them feasible.
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.
Would you like to save this?
We'll email this article to you, so you can come back to it later!
What The OBBBA Changed For Student Loan Borrowers
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.
Why Private Lenders Can't Fill The Gap
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:
- A majority of lenders required a minimum credit score of at least 640, with the most common minimum set at 670. The credit score requirement alone would exclude over 40% of potential borrowers from the vast majority of prime, traditional lenders.
- Every lender in the study requires the borrower or cosigner to be "creditworthy." This single requirement locks out over 1 in 4 Americans (25.7%) from qualifying for practically any private student loan.
- The median minimum household income requirement was $30,000, with the most common threshold set at $35,000. Based on income requirements alone, nearly 2 in 3 Pell Grant recipients (61.1%) would be denied by most private lenders.
- Between 61% and 100% of loans originated by the lenders in the sample have cosigners, showing the private market's heavy reliance on household wealth and family financial stability. This aligns with a prior CFPB study showing 90% of private undergraduate loans requiring cosigners.
- About 82% of non-profit student loan lenders (18 out of 22) and over half of all lenders studied are restricted by state residency requirements, further limiting who can access their products.
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.
Who Gets Hurt: Low-Income Families And Students Of Color
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.
The Growing "Shadow Student Debt" Market
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.
What Families Should Know
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.
Don't Miss These Other Stories:
Editor: Colin Graves
Robert Farrington is the founder of The College Investor and is widely recognized as one of the nation’s leading voices on student loan debt and saving for college. He holds an MBA from UC San Diego Rady School of Management and has spent over 15 years researching, writing, and advising on student loans, 529 plans, financial aid programs, and saving and investing for young professionals.
Robert has been featured in the The New York Times, The Wall Street Journal, The Washington Post, NBC News, and Forbes, where he has been a regular personal finance contributor for over a decade. His work combines both professional expertise and personal experience – he successfully navigated his own student loan repayment journey and has helped thousands of readers do the same.
He is committed to making the intersection of personal finance and education transparent and accessible. You can learn more about Robert on the About Page or on his personal site RobertFarrington.com.