MW Republicans want to curb federal student loans - and private lenders are ready to step in

By Jillian Berman

The House version of the tax and spending bill would put new limits on federal student-loan borrowing. The Senate is debating its own version this month.

For the past several years, it's been a dream in some right-leaning corners of the U.S. political sphere to privatize the student-loan system.

"Washington needs to get out of the student-loan business altogether," Lindsey Burke, the director of the Center for Education Policy at the right-leaning Heritage Foundation, told the audience at a recent student-loan conference in Alexandria, Va. Burke is also the author of the education chapter of Project 2025, which is a blueprint for restructuring the executive branch and federal agencies that is produced by the Heritage Foundation.

That may be a tall order. Right now, the government accounts for about 92% of the student-loan market - but if the Republican tax and spending bill becomes law, it could usher in an era of increased privatization of student lending.

"It's a very good opportunity," said Moshe Orenbuch, a managing director at TD Cowen who tracks private student-loan companies such as Sallie Mae $(SLM)$.

The House version of the Trump administration's megabill proposes major changes to the way the government makes student loans and collects on them that could create more room for private lenders in the market.

House Republicans have pitched setting limits on loans for graduate students and parents, two groups that right now are allowed to borrow up to the cost of attendance. At the undergraduate level, the bill shifts the structure of loan caps. It would also ban schools from receiving federal student loans for anything above the median cost of attendance for a given program. Schools could still charge whatever they want, say $10,000 above the median for a history degree, but students wouldn't be able to borrow that much money from the government.

"There's going to be significant gaps for some students and their ability to access federal grants and loans," said David Bergeron, a senior fellow at the left-leaning Center for American Progress and a more than 30-year veteran of the Department of Education. "Whenever there have been gaps in the past, the thing that comes at the end to fill those gaps is private student-loan debt."

The Senate is working on its own version of the tax and spending bill. It's unclear what elements of the House proposal will survive, but leading Republican senators have expressed interest in some similar proposals for student loans. The education provisions in the House version come with an estimated $350 billion in savings, making them attractive to lawmakers looking for places to cut spending.

If all the House proposals regarding student loans were implemented, that could slash annual federal student-loan originations by roughly $41 billion, according to an analysis from Orenbuch.

'Absolutely capture that opportunity'

Proponents of this approach say curbing federal student lending could force some discipline on the student-loan system. They say the flow of taxpayer dollars has provided little incentive for schools to keep costs low, and the challenges borrowers have experienced in repaying their loans are creating budget problems for the federal government.

But consumer and higher-education advocates worry that allowing private lenders to play a more significant role in the student-loan system comes with risks for students and families. For one, private student loans often come with fewer protections and options for repayment than federal loans. In addition, those who need financing the most are likely to face the worst terms, driving up the cost of college for low-income and low-wealth families.

Finally, when private lenders played a more prominent role in the market in the lead-up to the financial crisis, they at times provided financing for students enrolled at costly schools with dubious outcomes.

Regardless of any concerns, commercial lenders are eager to do more lending to students and families. Anthony Noto, the chief executive officer of SoFi $(SOFI)$, said that if lawmakers move forward with drastic changes to loan programs for graduate students and parents, "we'll absolutely capture that opportunity."

"We would love to do as much as we can in that market, and we'd be very happy to step in for the government," he said.

In an email, Rick Castellano, a spokesperson for Sallie Mae, said "it would be premature to make assumptions about market opportunity," given that the legislation is still being hammered out. But he added that "there seems to be broad agreement on addressing overborrowing in the federal program."

At the recent student-loan industry conference in Virginia, a representative from one lender said they wanted the federal government to be "the lender of last resort." Another representative noted that about 50% of parents borrowing from the government would qualify for a private loan.

Andrew Gillen, a research fellow at the Cato Institute, a libertarian think tank, described "laying the groundwork" so that private lenders would more easily be able to address any market void created by the federal government. Those steps include finding ways to give private lenders more power to collect.

"If you're suing over a $2,000 loan, that doesn't make a lot of sense," he said. "Porting over" the federal government's ability to garnish a borrower's wages without a court order in order to repay student loans "to private lenders would really help clear up the market," Gillen said.

From making the government money to costing taxpayers

If Republicans' proposals become law in some form, probably the most attractive opportunity for commercial lenders would be graduate students. The version of the reconciliation bill that passed the House of Representatives proposes limiting federal loans to a total of $100,000 for graduate students and $150,000 for professional students.

In recent years, policy makers have become increasingly concerned about the role of graduate-student borrowing in fueling the growth in student debt.

In the mid-2000s, Congress uncapped lending to graduate students so that borrowers could take out up to the cost of attendance for graduate programs. At the time, lawmakers didn't worry much about the impact, because the conventional wisdom was that most graduate students were borrowing to pay for high-earning programs, like medicine, and because these borrowers generally repaid their loans, which made the government money.

Fast-forward a few decades: In 2023, the Department of Education predicted that the government would soon disperse more money to graduate students than to undergraduates, even though graduate students make up about 20% of borrowers.

Today, "there are some places where the typical student is leaving a program with not just $100,000 but $200,000, $300,000 sometimes even more" in debt, said Jordan Matsudaira, the co-director of the Postsecondary Education and Economics Research Center at American University. "There are some programs where that's happening where it's not really the doctor story."

Many of these borrowers turned to income-driven repayment programs that allow borrowers to repay their debt as a percentage of their income and have the remainder canceled after a certain number of years. That has made lending to graduate students costly for the government, said Matsudaira, who worked as the first-ever chief economist at the Department of Education during the Biden administration.

"That fact, at least in the political conversation, has made graduate loans a target for reform," he said. "It used to be that cutting back on graduate lending would cost the government money. Now the opposite is true."

In an analysis of government data produced for MarketWatch, Matsudaira and Tia Caldwell, a research associate at PEER, found that there's at least $4.3 billion per year in graduate borrowing that's above the annual limits House Republicans are proposing. Most of the borrowing over the limit is for high-earning professional programs like medicine, dentistry and pharmacy, making most of them a good credit risk for private lenders.

"I would think that they would all be champing at the bit, salivating at the opportunity that's about to land in their laps," Matsudaira said.

A burden and a tool for access

The private market could also capture some of the borrowing done by parents. The House bill would require students to max out their own federal loan eligibility before allowing parents to borrow from the government. Then parent borrowing would be capped at $50,000 per family.

Right now, parents are allowed to borrow up to the cost of attendance, a practice that has raised alarms on both sides of the aisle. Parent Plus loans have a high origination fee, higher interest rates and more limited repayment options than federal loans available to students. In addition, a parent borrower is not receiving the boost in income from the degree they financed that could help them repay the debt.

Over the past several years, these loans have morphed from a liquidity tool for middle- and upper-middle-class families to a form of debt increasingly incurred by less wealthy families. In 2018, about 42% of Black families who the government has concluded are so poor that they can't be expected to contribute to the cost of college used a Parent Plus loan, according to the Century Foundation.

But making changes to the government's parental borrowing program is politically tricky. For one, the relatively ungenerous terms mean that it still makes money for the government. In addition, historically Black colleges and universities and their students often rely on Parent Plus loans.

MW Republicans want to curb federal student loans - and private lenders are ready to step in

By Jillian Berman

The House version of the tax and spending bill would put new limits on federal student-loan borrowing. The Senate is debating its own version this month.

For the past several years, it's been a dream in some right-leaning corners of the U.S. political sphere to privatize the student-loan system.

"Washington needs to get out of the student-loan business altogether," Lindsey Burke, the director of the Center for Education Policy at the right-leaning Heritage Foundation, told the audience at a recent student-loan conference in Alexandria, Va. Burke is also the author of the education chapter of Project 2025, which is a blueprint for restructuring the executive branch and federal agencies that is produced by the Heritage Foundation.

That may be a tall order. Right now, the government accounts for about 92% of the student-loan market - but if the Republican tax and spending bill becomes law, it could usher in an era of increased privatization of student lending.

"It's a very good opportunity," said Moshe Orenbuch, a managing director at TD Cowen who tracks private student-loan companies such as Sallie Mae $(SLM.AU)$.

The House version of the Trump administration's megabill proposes major changes to the way the government makes student loans and collects on them that could create more room for private lenders in the market.

House Republicans have pitched setting limits on loans for graduate students and parents, two groups that right now are allowed to borrow up to the cost of attendance. At the undergraduate level, the bill shifts the structure of loan caps. It would also ban schools from receiving federal student loans for anything above the median cost of attendance for a given program. Schools could still charge whatever they want, say $10,000 above the median for a history degree, but students wouldn't be able to borrow that much money from the government.

"There's going to be significant gaps for some students and their ability to access federal grants and loans," said David Bergeron, a senior fellow at the left-leaning Center for American Progress and a more than 30-year veteran of the Department of Education. "Whenever there have been gaps in the past, the thing that comes at the end to fill those gaps is private student-loan debt."

The Senate is working on its own version of the tax and spending bill. It's unclear what elements of the House proposal will survive, but leading Republican senators have expressed interest in some similar proposals for student loans. The education provisions in the House version come with an estimated $350 billion in savings, making them attractive to lawmakers looking for places to cut spending.

If all the House proposals regarding student loans were implemented, that could slash annual federal student-loan originations by roughly $41 billion, according to an analysis from Orenbuch.

'Absolutely capture that opportunity'

Proponents of this approach say curbing federal student lending could force some discipline on the student-loan system. They say the flow of taxpayer dollars has provided little incentive for schools to keep costs low, and the challenges borrowers have experienced in repaying their loans are creating budget problems for the federal government.

But consumer and higher-education advocates worry that allowing private lenders to play a more significant role in the student-loan system comes with risks for students and families. For one, private student loans often come with fewer protections and options for repayment than federal loans. In addition, those who need financing the most are likely to face the worst terms, driving up the cost of college for low-income and low-wealth families.

Finally, when private lenders played a more prominent role in the market in the lead-up to the financial crisis, they at times provided financing for students enrolled at costly schools with dubious outcomes.

Regardless of any concerns, commercial lenders are eager to do more lending to students and families. Anthony Noto, the chief executive officer of SoFi (SOFI), said that if lawmakers move forward with drastic changes to loan programs for graduate students and parents, "we'll absolutely capture that opportunity."

"We would love to do as much as we can in that market, and we'd be very happy to step in for the government," he said.

In an email, Rick Castellano, a spokesperson for Sallie Mae, said "it would be premature to make assumptions about market opportunity," given that the legislation is still being hammered out. But he added that "there seems to be broad agreement on addressing overborrowing in the federal program."

At the recent student-loan industry conference in Virginia, a representative from one lender said they wanted the federal government to be "the lender of last resort." Another representative noted that about 50% of parents borrowing from the government would qualify for a private loan.

Andrew Gillen, a research fellow at the Cato Institute, a libertarian think tank, described "laying the groundwork" so that private lenders would more easily be able to address any market void created by the federal government. Those steps include finding ways to give private lenders more power to collect.

"If you're suing over a $2,000 loan, that doesn't make a lot of sense," he said. "Porting over" the federal government's ability to garnish a borrower's wages without a court order in order to repay student loans "to private lenders would really help clear up the market," Gillen said.

From making the government money to costing taxpayers

If Republicans' proposals become law in some form, probably the most attractive opportunity for commercial lenders would be graduate students. The version of the reconciliation bill that passed the House of Representatives proposes limiting federal loans to a total of $100,000 for graduate students and $150,000 for professional students.

In recent years, policy makers have become increasingly concerned about the role of graduate-student borrowing in fueling the growth in student debt.

In the mid-2000s, Congress uncapped lending to graduate students so that borrowers could take out up to the cost of attendance for graduate programs. At the time, lawmakers didn't worry much about the impact, because the conventional wisdom was that most graduate students were borrowing to pay for high-earning programs, like medicine, and because these borrowers generally repaid their loans, which made the government money.

Fast-forward a few decades: In 2023, the Department of Education predicted that the government would soon disperse more money to graduate students than to undergraduates, even though graduate students make up about 20% of borrowers.

Today, "there are some places where the typical student is leaving a program with not just $100,000 but $200,000, $300,000 sometimes even more" in debt, said Jordan Matsudaira, the co-director of the Postsecondary Education and Economics Research Center at American University. "There are some programs where that's happening where it's not really the doctor story."

Many of these borrowers turned to income-driven repayment programs that allow borrowers to repay their debt as a percentage of their income and have the remainder canceled after a certain number of years. That has made lending to graduate students costly for the government, said Matsudaira, who worked as the first-ever chief economist at the Department of Education during the Biden administration.

"That fact, at least in the political conversation, has made graduate loans a target for reform," he said. "It used to be that cutting back on graduate lending would cost the government money. Now the opposite is true."

In an analysis of government data produced for MarketWatch, Matsudaira and Tia Caldwell, a research associate at PEER, found that there's at least $4.3 billion per year in graduate borrowing that's above the annual limits House Republicans are proposing. Most of the borrowing over the limit is for high-earning professional programs like medicine, dentistry and pharmacy, making most of them a good credit risk for private lenders.

"I would think that they would all be champing at the bit, salivating at the opportunity that's about to land in their laps," Matsudaira said.

A burden and a tool for access

The private market could also capture some of the borrowing done by parents. The House bill would require students to max out their own federal loan eligibility before allowing parents to borrow from the government. Then parent borrowing would be capped at $50,000 per family.

Right now, parents are allowed to borrow up to the cost of attendance, a practice that has raised alarms on both sides of the aisle. Parent Plus loans have a high origination fee, higher interest rates and more limited repayment options than federal loans available to students. In addition, a parent borrower is not receiving the boost in income from the degree they financed that could help them repay the debt.

Over the past several years, these loans have morphed from a liquidity tool for middle- and upper-middle-class families to a form of debt increasingly incurred by less wealthy families. In 2018, about 42% of Black families who the government has concluded are so poor that they can't be expected to contribute to the cost of college used a Parent Plus loan, according to the Century Foundation.

But making changes to the government's parental borrowing program is politically tricky. For one, the relatively ungenerous terms mean that it still makes money for the government. In addition, historically Black colleges and universities and their students often rely on Parent Plus loans.

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June 07, 2025 08:30 ET (12:30 GMT)

MW Republicans want to curb federal student loans -2-

These schools typically have less money than predominantly white schools to give out in financial aid. In addition, due to the racial wealth gap, their families tend to have less funding to draw on to pay for school. When the Obama administration tightened credit standards for Parent Plus loans, many parents of HBCU students suddenly became ineligible for financing, putting those students at risk of not finishing college and the institutions at risk of collapsing. The administration eventually reversed course.

"Parent Plus loans are the millstone around the necks of incredible numbers of people," said A. Wayne Johnson, who headed the Office of Federal Student Aid, which oversees the student-loan program, during part of the first Trump administration. "It's also the vehicle for access."

Major changes to undergraduate lending

The House bill also proposes major changes to undergraduate lending that, if adopted, could push more students and families toward private lenders. Whether the companies will want to fill those gaps and on what terms is less clear.

The proposal would raise undergraduate annual loan limits significantly by allowing students to borrow up to the median annual cost of attendance for their program. But it would cap the lifetime undergraduate limit at $50,000. That leaves open two opportunities for private lenders. The first is to provide gap financing for students who attend programs that cost more than the median. The second is to lend to third- and fourth-year students who blow through their federal loan eligibility in their first two years of schooling.

"You're left with people who already made it through two years to rely on private lending," Matsudaira said. "That's a pretty attractive deal. You're getting people looking for loans to finance their third and fourth year, and those loans tend to be higher performing."

The proposal also includes a form of risk-sharing, a concept with bipartisan support that asks colleges to be on the hook for some percentage of loans their students struggle to repay. The goal of these accountability measures is to push schools to ensure that their programs have good outcomes and aren't too costly for students.

But Alex Ricci, the president of the National Council of Higher Education Resources, a trade group that includes student-loan servicers and debt-collection agencies, said the risk-sharing provision could push schools to shutter programs that lead to low-paying jobs.

"You could see a huge expansion for those families that have credit to get your history degree at a private nonprofit college down the road," he said. "That brings into a larger question of what is the point of higher education? And what is the federal government willing to subsidize?"

He said the bill indicates that the Republican party is saying, "We're willing to subsidize as long as there's a return on investment. That's going to force a choice on institutions. For my art history program, am I willing to subsidize students in that program ... so that I can continue to open up access to that program for people with disadvantaged backgrounds?" he said.

Opportunistic lenders 'suiting up'

Proponents of these reforms say they'll incentivize schools to keep prices low and push students and families to make more careful borrowing decisions. Theoretically, opening up a bigger role for the private market should mean that bad risks aren't financed, because unlike the federal government, commercial lenders use underwriting.

The challenge, though, is that the stricter underwriting standards could make college more costly or not available at all to students whose families have poor credit or no credit, but who could use the financing to earn a degree and successfully repay the loan. What's more, if history is any indication, at least some commercial lenders will find a way to finance poor-performing programs, experts warn.

"You're going to have some subprime component to this. You're going to have the predatory lenders emerge," Johnson, the former senior Department of Education official in the first Trump administration. "There are a large number of opportunistic lenders out there that are absolutely suiting up to put themselves front and center."

Before the financial crisis, commercial lenders played a larger role in the student-loan system and in many cases didn't shy away from poor-performing loans. In 2022, Navient $(NAVI)$ agreed to cancel $1.7 billion in private student loans as part of a settlement with 39 state attorneys general. The deal settled claims that Navient's corporate predecessor, Sallie Mae, worked with schools that had low graduation rates, including for-profit colleges, to provide financing for the gap between what the schools charged and what federal student loans would cover, and that the company made the loans knowing borrowers would struggle to repay them.

At the time of the settlement, Navient denied violating any laws, including consumer-protection laws.

"The company's decision to resolve these matters, which were based on unfounded claims, allows us to avoid the additional burden, expense, time and distraction to prevail in court," Navient's then-chief legal officer Mark Heleen said in a 2022 statement.

Other lenders also found ways to distance themselves from the risk associated with lending to students. For roughly two decades leading up to the financial crisis, a company called First Marblehead securitized loans from several private lenders through a vehicle called National Collegiate Student Loan Trusts. Decades later, media outlets and the Consumer Financial Protection Bureau alleged that the trusts sued borrowers over debts that they couldn't prove the borrowers owed, among other claims.

Toward the end of the Biden administration, the CFPB and the trusts filed a proposed settlement that would have required the trusts to pay $2.25 million in redress to student-loan borrowers. A few months later, the Trump-era CFPB filed paperwork to voluntarily dismiss the case.

These days, the quality of private student loans being securitized is much higher than during the private student-lending boom leading up to the financial crisis, said Kayvan Darouian, the lead research analyst covering the asset-backed securities market at Deutsche Bank.

"I don't see them necessarily widening the box and loosening on credit," he said. Still, he added, it could happen. "Some of the other sectors I cover are subprime auto loans. Within that you can go deep subprime. If the loans are underwritten properly and priced for the risk, it's a possibility."

Darouian said that he's also seen interest from private credit in student lending and that private securitization could provide a home for riskier student-loan assets.

"The most important effect it's going to have in the short run is waking schools up," Johnson said of Republican proposals. "Whether it manifests in actual reductions in their pricing I don't know."

-Jillian Berman

This content was created by MarketWatch, which is operated by Dow Jones & Co. MarketWatch is published independently from Dow Jones Newswires and The Wall Street Journal.

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June 07, 2025 08:30 ET (12:30 GMT)

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