More college students are expected to turn to private loans this year as new federal caps restrict how much they can borrow from the government. Many of them will likely get turned away.
Roughly 40% of Americans couldn’t qualify for a traditional private student loan, according to a new joint report from the advocacy group Protect Borrowers and The Century Foundation, a progressive think tank. The report’s authors say those who are denied will essentially be left with two undesirable options: Borrow from “shady” lenders or forgo college altogether.
“We think this is really a dark moment for the future of higher education,” says Jennifer Zhang, a policy, research and data analyst at Protect Borrowers who co-authored the report along with Century Foundation fellow Peter Granville. “A market that outright denies 40% of Americans should not be playing gatekeepers for higher education in this country.”
[Read: Best Private Student Loans.]
The study, which examined the underwriting criteria of more than 30 private lenders, comes as President Donald Trump’s overhaul of the federal student loan program is set to impose tighter borrowing limits on both graduate students and parents. Those borrowers had previously been allowed to take out federal loans up to the total cost of attendance without having to meet credit score or income requirements.
Starting July 1, borrowing for graduate students in most programs will be capped at $20,500 per year and $100,000 total. Parents taking out loans for undergraduate students will be limited to $20,000 annually and $65,000 lifetime for each child. (“Professional” students in specific fields such as medicine and law have higher caps of $50,000 annually and $200,000 total.)
Undergraduate borrowing limits will remain the same, with a lifetime ceiling of $31,000 for most students.
Because federal loans come with a relatively low fixed interest rate and protections such as forbearance and income-driven repayment, most borrowers choose to max out those options before seeking private loans. As a result, private loans account for only about 8% of all student loan debt.
With college costs at many institutions far exceeding the new federal limits, private lenders are gearing up to play a larger role in higher ed financing.
About 30% of professional programs and 26% of graduate programs have average borrower debt that exceeds the new federal caps, according to an analysis by Robert Kelchen, a professor of education at the University of Tennessee, who regularly breaks down data on college costs and student loans in his education blog. He found that 461 graduate programs had average student borrowing of over $50,000 annually, more than double what those students will now be allowed to take out in federal loans.
“Now that federal graduate student loans are being capped, quite a few students are going to need private loans in order to afford grad school,” says Kelchen. “The two big questions in my view are whether students are willing to take out private loans and how selective private lenders are going to be in offering loans to students.”
[Read: Best Parent Student Loans: Parent PLUS and Private.]
If graduate borrowers are counting on lenders to relax their requirements, they may be disappointed. Zhang and Granville’s study found that while most private lenders don’t differentiate between undergrad and graduate criteria, those that do actually have a higher bar for graduate students to qualify.
The study also found that low-income borrowers will likely be disproportionately denied by private lenders. For example, nearly two-thirds of Pell Grant recipients wouldn’t qualify for private student loans at most traditional lenders, according to the report. Zhang worries this could result in a greater economic divide between those who can attend college and those who can’t.
“The long-term effect is that access to higher education is going to be restricted to students from wealthy families,” says Zhang. “Students who don’t come from those backgrounds, students who are low income and from disadvantaged communities, will be forced much more to give up on their dreams of higher education.”
[Read: Best Student Loans Without a Cosigner]
The federal borrowing caps are one of several levers the Trump administration is pulling in an attempt to rein in college costs and student debt. The idea is that if students are limited in the amounts they can borrow, colleges will be forced to lower tuition, or at least keep it steady. Whether it has a noticeable impact remains to be seen.
Consumer groups and student advocates say they’re not necessarily asking private lenders to relax their standards. While that may increase access to education, it would also likely lead to a worsening student debt problem.
“It’s such an odd position to be in to be both wanting people to have access to the programs but also not wanting people to be saddled with debt that they’re going to struggle to repay,” says Michele Zampini, associate vice president of federal policy and advocacy at The Institute for College Access & Success.
The study’s authors say they’d like to see the the government fund colleges in a way that minimizes the amount any student needs to borrow.
“It is long overdue for federal and state governments to directly fund higher education as a public good, and not finance it through debt that undermines the very opportunities it is meant to create,” they write in the report.
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More Students Will Soon Need Private Loans. 40% Won’t Qualify, Study Finds originally appeared on usnews.com
