Private student loan lenders are confronting a significant credit challenge as the July 1 deadline for new federal borrowing caps approaches, while the Department of Education has once again delayed mandatory exits from the SAVE repayment plan. The shifting landscape could funnel more graduate and parent borrowers into the private market, but new data suggests that many of these potential borrowers may be too risky for lenders to serve profitably.
SLM Corp (NASDAQ:SLM), the parent company of Sallie Mae, has projected that federal student loan changes could generate an additional $4.5 billion to $5 billion in annual originations, representing roughly one-third of the current private-education-loan market. However, independent research cited by Inside Higher Ed indicates that at least 10% of postbaccalaureate students face both a funding gap and weak or no credit history. This dual challenge means lenders may see a surge in applications but could ultimately turn down many borrowers or require cosigners.
The market has responded positively to the potential for increased volume. As of the regular session close, SLM shares rose 3.6%, while SoFi Technologies (NASDAQ:SOFI) gained 3.4%. Nelnet (NYSE:NNI) edged up 0.6%, and Navient (NASDAQ:NAVI) added 2.8%. Combined, these four companies are valued at approximately $35 billion.
The Education Department informed a federal court this week that SAVE plan borrowers will not face forced exits until at least September 29, with transfers to other repayment plans occurring in waves. However, the July 1 caps for new federal borrowers remain in place. Borrowers who do not respond to notices will be moved to the Standard or Tiered Standard plan, according to the department. “If you take out a loan, you must pay it back,” Education Undersecretary Nicholas Kent stated in March.
Legal challenges continue to cloud the transition. Borrowers’ attorneys at Public Goods Practice have filed for a preliminary injunction, arguing that the REPAYE plan remains “law on the books” and that the agency should not end benefits already earned. Attorney Austin Hinkle told Business Insider that injuries could “start to happen right away” if the court does not intervene.
SLM’s own portfolio data underscores the credit filter. The Smart Option portfolio has a weighted average FICO score of 746, with only 23% of borrowers falling below 700. The Postsecondary Education and Economics Research Center at American University estimates that at least a quarter of postbaccalaureate students would need to rely on private loans or alternative funding at current tuition levels, and nearly 40% of those have subprime or no credit.
Industry analysts caution that private lenders cannot fully replace the lost federal loan volume. Beth Akers, senior fellow at the American Enterprise Institute, told Inside Higher Ed that the private market will not make up all the difference. Bonnie Latreille of the Student Borrower Protection Center warned that some students could face “way more expensive loans” or lose access entirely. Scott Buchanan of the Student Loan Servicing Alliance urged schools and lenders to “walk before we run” while awaiting regulatory clarity.
Federal student loans remain the dominant risk indicator. Federal Student Aid data from June 23 shows 42.6 million borrowers owe $1.7 trillion, with 9 million in default on $220 billion and 8.4 million holding $485 billion in forbearance. Income-driven repayment accounts for $784 billion among 13 million borrowers.
Looking ahead, July 1 marks the implementation of new federal caps and repayment structures for new borrowers, while September 29 is now the earliest date SAVE borrowers could be moved to alternative plans. The credit test for private lenders will intensify as they navigate this transition, balancing volume growth against rising risk.
