If you’re planning to begin graduate school this year, there’s suddenly a much greater chance you’ll need to take out private student loans to help cover the costs.
But how are lenders going to decide whether you’re worth the risk? They may start trying to predict your future.
A wave of new graduate student borrowers is expected to flood the private lending market starting this year after the Trump administration placed caps on the amount of federal loans those students can borrow. The limits would likely affect more than a quarter of graduate school borrowers, researchers estimate.
But this is no ordinary group of borrowers. They present a blend of risk and opportunity that has private lenders both “salivating” and scratching their heads.
Consider the typical graduate student reaching out to a private lender. They are likely already saddled with federal student debt, assuming they maxed out those loans first. Many will have thin credit history or low FICO scores. Yet they’re actively investing in their future, in many cases chasing a degree that could lead to high earnings.
In many ways, they’re a great unknown. Because the federal government previously allowed graduate students to borrow as much as they needed for school, they rarely had any reason to seek private loans, which have fewer protections, tougher qualifying standards and often higher interest rates. Likewise, lenders had little incentive to adjust their traditional underwriting criteria to accommodate a tiny sliver of the market.
We’re left with an awkward match: Lenders who are used to evaluating past and current financial data, and students whose greatest attribute may be their potential.
Now, lenders are debating how to capture this new market without taking on excessive risk or opening themselves up to legal trouble. And those grad students are about to come calling.
“It’s going to be a bit of a s— show,” says Jeannie Tarkenton, founder and CEO of Funding U, a private lender that provides undergraduate outcomes-based loans, which weigh factors such as a student’s academic performance and major. She says she’s heard from some large lenders that “are just salivating to come after this market.”
[Read: Best Student Loans for Graduate School]
The Borrowers Who Will Need Private Loans
For years, graduate students have been able to borrow up to the cost of college attendance through federal Grad PLUS loans, regardless of what program they’re studying or its price tag. While that opened up access to many students, it also resulted in ballooning debt. Graduate student loans account for about half of the $1.7 trillion outstanding federal student loan balance.
In an attempt to tackle student debt and force colleges to lower costs, President Donald Trump axed the Grad PLUS program and imposed limits on the amount students can borrow for grad school. The caps, ushered in as part of an extensive federal student loan overhaul included in the One Big Beautiful Bill Act, go into effect starting July 1.
Under the new limits, graduate students can borrow $20,500 annually up to a maximum of $100,000 total. Those pursuing certain “professional” degrees, such as medicine and law, can borrow $50,000 per year and $200,000 in aggregate.
About 28% of graduate borrowers exceed those limits, according to a report published by the Federal Reserve Bank of Philadelphia. On average, those students would need to borrow an additional $21,700 after hitting the caps, the study’s authors found.
“In the graduate student space, these loan caps are so aggressive that they’re really going to affect a lot of borrowers,” says Jordan Matsudaira, a professor of economics and public policy at American University and one of the authors of the Philadelphia Fed report.
Matsudaira says that as much as $12 billion in annual graduate borrowing could shift from federal to private, according to a separate analysis he conducted with the team he leads at the PEER Center, a research hub based at American University. That’s roughly one-third of all graduate borrowing. His research team released a new tool this month that allows the public to search how the graduate caps will impact various schools, states and programs.
Why Grad Students May Struggle to Get Loans
Unless you can find a cosigner with a strong financial profile, getting a student loan for grad school may be a challenge.
The authors of the Philadelphia Fed study also analyzed credit data, and they found that about four in 10 of the borrowers who would need private student loans don’t have credit scores that would qualify them. (Most private lenders require credit scores of 670 or higher.)
Another study by the advocacy group Protect Borrowers similarly found that 40% of Americans wouldn’t qualify for private student loans.
Of course, these studies indicate that about three in five borrowers would likely qualify for the loan they need, although maybe with less favorable terms than they would have received from the government. Private lenders will happily accommodate many of these borrowers, as well as those with a creditworthy cosigner.
The question is how they attempt to address the students who don’t meet their current standards for lending. If they want that business, private lenders have essentially two choices: Relax their current requirements or figure out a new formula — perhaps one that predicts just how financially successful you will be.
[Read: Best Private Student Loans.]
Want a Loan? Pick the Right Degree
Some lenders already consider the graduate degree you’re pursuing, at least at a basic level. Many of the major players offer specific loans for medical students or law students, for example. But factors like credit score and debt-to-income ratio are still overwhelmingly what determine your eligibility.
Over the past decade, a few student loan companies have introduced products called outcomes-based loans, which heavily weigh factors that may indicate a borrower’s future earnings. These lenders say they may consider historic earnings for graduates of the program you’re entering, previous academic performance, how much progress you’ve made toward your degree and more.
“This is definitely the direction the industry is moving,” says Ken Ruggiero, founder and CEO of Ascent Funding, a private lender that provides both traditional and outcomes-based student loans to graduate students as well as undergrads. “The traditional model relies on credit scores and cosigners, which reflect past financial history, not future earning potential. That creates a clear gap. The shift is less about if and more about how quickly lenders adapt.”
Tarkenton, the Funding U CEO, says her company isn’t in the grad school market, but “we are watching it very closely.”
“We’re watching for where we can play in that field and where we can do it profitably and responsibly,” Tarkenton says. “There will be a role for us there.”
Lenders now have much greater access to earnings data and success rates of graduates from various college programs than they did even a decade ago. If more lenders start plugging that data into their underwriting formulas, it could create a scenario where the degree you choose could determine whether you get approved. Students in costly but less lucrative fields could struggle to get loans.
“The reality is that some of this the private sector will not be able to finance,” says Scott Buchanan, executive director of the Student Loan Servicing Alliance, a nonprofit trade association whose members service the majority of federal and private student loans. “There are certain programs of study where private lenders are going to say, ‘The amount you’re borrowing relative to the earned income that you will accrue above and beyond what you would have had, it’s not great ROI.'”
But Buchanan says private lenders must contend with several challenges, which is why many are moving cautiously.
First, they want to know more about the federal loans a grad student already has, Buchanan says. Lenders can see if a prospective borrower has federal student loans, but they can’t identify which type of loans those are. Additionally, many borrowers weren’t required to make any monthly payments on their loans during post-pandemic pauses, which makes it hard for lenders to determine a borrower’s on-time payment history.
There are also some legal landmines to navigate. While college programs’ outcomes data can be useful in making lending decisions, the practice has gotten loan companies in hot water before. For example, if a lender favors students at some colleges or programs over those from others, that may disproportionately affect certain demographics. The result could cause lenders to run afoul of discrimination laws.
“It’s going to be a slow learning process,” says Buchanan. “From an underwriting perspective, I think people are going to be looking at: Are there other attributes that I can get beyond just their credit file that I can really use to make big decisions about lending? I think underwriting will evolve, but I don’t think it will happen overnight.”
[Read: Best Student Loan Refinance Lenders.]
New Players and New Ideas
Because private loans have typically made up less than 10% of all student borrowing, the market has been relatively limited to about 15 major players along with various local institutions. But observers expect new companies, particularly fintechs, to emerge as demand for private loans increases.
Existing private lenders have spent much of the past year in discussions with colleges, lobbying for spots on universities’ preferred lender lists that are distributed to families and also brainstorming other ways to accommodate heightened demand. Some universities, particularly those with large endowments, are exploring risk-sharing deals with lenders where the school would take on some of the exposure to loans.
Experts anticipate more financing ideas to emerge in the next few years, although perhaps not in time for this year’s grad students.
“I think you’ll see some experimentation,” says Matsudaira. “But it will mostly be small and around the margins, and we’ll kind of see how it shakes out over time.”
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Will Your Student Loan Company Choose Your Degree for You? originally appeared on usnews.com
