The government’s new rates on student borrowing are, in theory, designed to eventually push colleges to share in the cost of graduate education. But less than two months before those restrictions go into effect, universities and private lenders are already building private lending pipelines that can keep tuition high while forcing students and their families into more dangerous debt.
Financial services company Ascent recently raised $45 million to expand its student lending platform, identifying personal loans as a major opportunity. The University of Pennsylvania has announced partnerships with private lenders, Yale’s School of Public Health is expanding its loan option and law schools from the University of Kansas to the University of Washington in St.
These institutions are quick to keep tuition money flowing. Students just trying to pay for college will pay the price.
Imagine you’re a first-generation college student trying to figure out how to pay for school. Loans and government grants get you a little bit there, but they don’t cover the entire bill, let alone food and housing. The federal government’s current position is unclear: If you can’t afford it, don’t go.
The figures established in the One Big Beautiful Bill Act represent a major change in federal student loans. For decades, parents and graduate students can take out federal loans for up to the full cost of attendance. Starting July 1, parents will face a $65,000 lifetime borrowing limit per child, and graduate students will face a $100,000 lifetime cap, with higher limits for certain state-designated professional programs.
The Department of Education estimates that these new figures will reduce student loans by 39 percent and parent loans by 32 percent over the next decade.
Proponents have rightly pointed out that government borrowing has contributed to higher education costs. Often, the costs do not equal the expected benefits.
The hope is that severely limiting government borrowing will discipline the markets—forcing institutions to cut rates or end programs because lenders won’t lend money they don’t believe borrowers can repay. But the idea that the private market will get student loans right is just a prediction, and one that ignores the lessons of the past.
In the early 2000s, private lenders became involved in widespread subprime lending, offering subprime schemes for profit and charging students with heavy debt. That growth was driven by two forces: Government loans dominated the market, leaving little incentive for lenders to screen borrowers carefully, and other institutions offered incentives that distorted lending decisions.
Both of those aspects are still relevant today. The government-controlled market will remain. About three in four graduates are expected to stay under the new caps, meaning private loans will still be more effective as well as government loans – which have been popular with borrowers.
And as recent announcements from lenders and universities suggest, institutions may once again be directing students to private lenders in ways that prevent due diligence. These agreements can allow institutions to maintain academic standards and still enroll students in underperforming programs.
Withholding higher education from those who cannot afford it is inherently discriminatory and disruptive to society. As well as guaranteeing access to education with loaned degrees that throw people into decades of financial ruin.
Current law does not expressly require institutions to disclose side agreements with lenders, including upfront fees paid by universities and bailout agreements that require institutions to pay lenders when borrowers default. Lenders are also not required to disclose whether the loan has been disclosed to investors—getting a quick payment while passing the risk—or whether their analysis suggests borrowers are unlikely to default.
The Department of Education has adopted a new policy to warn prospective students who fill out federal loan applications that they are unlikely to see a return from the institution they are considering borrowing to attend. Private lenders should be held to at least the same standards of transparency.
Lawmakers have a responsibility to protect borrowers before it takes effect on July 1. If they don’t, we already know what’s next: Students will do what they need to do to graduate, but no matter how hard they work, too many won’t make enough money to meet their monthly payments. They will pay more than they borrowed and still owe twice as much due to interest and late fees. They will be left with bad credit and no savings. This is our chance to intervene before students and their families are forced to pay the price for this system’s failure.
