Private lenders may assess credit and income to determine eligibility
Students are increasingly turning to private lenders after new Trump administration caps on federal graduate and parent loans took effect this summer, The Wall Street Journal reported. Students are also navigating greater unpredictability with interest rates and loan terms. For students who need to borrow beyond the federal limits, private loans are not a sure bet. Private lenders may assess credit histories and incomes to determine eligibility and interest rates, and private repayment options might not be as flexible as federal income-based plans; some students might not qualify for private loans at all.
Under the new rules, federal graduate borrowing is capped at $20,500 or $50,000 a year, depending on the borrower’s field of study. A $257,500 lifetime limit covers federal borrowing including undergraduate loans, while parents may borrow $20,000 a year. Before the change, graduate students could borrow against the full cost of attendance and parents could borrow up to the full cost of their child’s undergraduate education.
The Education Department said the changes were partly intended to address rising college costs that can leave graduates with debt extending into their retirement years.
Victoria Chasin, a 24-year-old from Colorado accepted to medical school earlier this year, expected to receive $50,000 in federal loans annually but quickly realized she would need more. Her father cosigned for a $54,000 private loan, and Chasin reduced its interest rate to 3% partly by choosing to make $25 monthly payments while in school. Chasin said she remained concerned about having to obtain another private loan during each year of medical school.
“You never know what the rates are going to be,” said Chasin, a 24-year-old from Colorado.
Federal loans generally do not require a credit check and carry fixed interest rates regardless of a borrower’s credit history. The Wall Street Journal reported this year’s federal graduate-loan rate at 8.07%. Private lenders may assess credit histories and incomes to determine both eligibility and interest rates. Private repayment options might not be as flexible as federal income-based plans, and some borrowers with federal student loans can qualify for forgiveness if they work for a qualifying employer in public service for a certain amount of time.
Higher-education advocates worry that the push toward private lending will leave many students unable to qualify to fund their education. “Some borrowers are going to be able to access these loans and some aren’t,” said Kristin Blagg, principal research associate at the Urban Institute who focuses on higher-education policy.
South Carolina Student Loan responded to the demand by lowering its credit-score requirement to 600 for students in healthcare fields. The lender typically requires a score of 670 or above. Ray Jones, the company’s chief product officer, said graduate loans grew between 300% and 400% from the previous year. The average amount requested rose to $34,000 from $19,000, and the lender introduced a forbearance program for medical students in residency.
Sallie Mae, one of the largest private student-loan lenders, projected a 12% to 14% increase in private-loan originations this year because of the federal caps. The Wall Street Journal said the changes are expected to reshape student lending in coming years. Federal loans still accounted for more than 90% of total outstanding student debt as of March, according to estimates from Enterval Analytics. Private lenders have been preparing for increased interest from students, families and universities.
Tens of thousands of students and parents completed a private-loan prequalification application this year, said Marc Schoonover, general manager of ELFI, the student-lending division of SouthEast Bank. Schoonover said the company increased its staff to accommodate the interest.
Private loans can provide a lower rate for some borrowers. Marni Sassaman, who works in sales management for a wine company, chose private loans for her son’s education because she had a strong credit score and expected to receive a favorable rate. “It seemed like everything was changing so much,” Sassaman said of the federal loan program. She said she obtained a lower rate than this year’s 9.07% rate for federal Parent Plus loans.
The alternatives remain uneven for borrowers. Federal loans generally retain fixed rates regardless of credit history and offer income-based repayment and potential forgiveness, while private lenders may assess credit histories and incomes to determine eligibility and interest rates. Chasin said she remained concerned about uncertain rates and taking out another private loan every year of medical school.