Report Comes as State-Based Private Lending Industry Ramps up Efforts to Weaken Transparency and Bypass Anti-Corruption Rules Set by Congress to Protect Students

August 21, 2026 | WASHINGTON, D.C. — Today, Protect Borrowers released the results of an investigation into the unique risks posed by state-backed private student loans and called on policymakers to reject industry lobbyist efforts to promote these loans as “safer alternatives” amid the current student debt and college affordability crisis. This new investigation, which is based on a review of court filings, consumer complaints, and other public records, documents how many state-backed private student loans feature high interest rates, few flexible repayment options, and abusive debt collection tactics when borrowers fall behind. The report comes as millions of families struggle to figure out how they will pay for college after President Trump’s One Big Beautiful Bill Act (OBBBA) made unprecedented cuts to federal financial aid, forcing families to resort to alternative options to finance a college degree.

The report, “The Worst of Both Worlds: An Investigation of State Student Loan Lending” is available here. An accompanying blog on the report’s findings can be found here.

Over the last year, private lenders—including state-based private loan companies—have openly prepared for an influx of customers and promoted their products to families who may face massive financial aid gaps created by OBBBA. Several states have also begun exploring efforts to start or expand state-backed loan programs in response to the new law. At the same time, the state-based lending industry has been lobbying Congress to weaken preferred lender rules—anti-corruption safeguards Congress established after lenders were found paying kick-backs to schools for promoting their loan products to students. The report lands the same month that the Senate HELP Committee voted to advance legislation that would exempt state-based lenders from these transparency and conflict of interest rules and make it easier for schools to steer students into state-based lending programs.

This report is the most comprehensive investigation into the current state-based student loan market to date. It finds that many state programs fail to provide loans that are more borrower-friendly than their for-profit counterparts, documents the myriad of challenges borrowers face when dealing with these lenders, and details the aggressive collection practices state-based private lenders deploy when borrowers fall behind.

“Many state-based lenders lean on their nonprofit status and connection to the state to tout their products as the safer, more borrower-friendly alternative to traditional private student loans. But, as this investigation shows, that’s often not the case, and, in fact, state student loans can carry unique risks for borrowers,” said Sophie Laing, Fellow at Protect Borrowers and author of the investigative report. “Too often, state-based programs saddle students and families with loans with the worst features of both traditional for-profit private loans and federal loans. These loans can lack critical rights and protections like the ability to tie your monthly bill to your income and access pathways for debt relief like Public Service Loan Forgiveness or discharge in the case of death or permanent disability. At the same time, these lenders wield some of the most aggressive debt collection powers in the industry—similar to those in the federal student loan program—and have been found engaging in abusive practices when borrowers fall behind. State-backed private loans can be the worst of both worlds and students, families, and policymakers should beware.”

“Now that President Trump’s One Big Beautiful Bill took an ax to federal financial aid programs that students rely on to pay for college, we are seeing the private lending industry—including state-backed private lenders—jump at the chance to capitalize on the financial desperation that many families are feeling,” said Aissa Canchola Banez, Policy Director at Protect Borrowers. “This report shows that these loans can be even riskier for students and families, and leave them with fewer options for recourse if they fall behind or experience abuse at the hands of their lender. Policymakers should take note, reject any effort to make it easier for schools to drive students into these state-based lending products, and instead increase critical transparency, oversight, and borrower protections in the private student loan market.”

Key findings from the investigation include:

  • Despite state agencies’ claims, state student loans can be expensive and lack critical protections and pathways for relief. Like private student loans, many state-based loan borrowers generally lack access to Income-Driven Repayment, and pathways for debt relief like Public Service Loan Forgiveness, Total and Permanent Disability Discharge, Borrower Defense to Repayment, and Closed School Discharge. Despite advertising affordable interest loans, the most affordable interest rates are typically unavailable to the majority of borrowers who may not have exceptional credit scores.
  • State-based lenders deploy aggressive and draconian collection practices on student loan borrowers who fall behind. Many state-based lending agencies hide behind the veneer of being a state-based government or non-profit agency and include language on their websites implying that their products are safer and that borrowers will have programs to help them if they fall behind. This is not the case. State-based lenders have been found deploying aggressive debt collection practices, including pursuing the families of deceased students, suing students in court, garnishing wages and state tax refunds, and even revoking professional licenses. Many of these collection powers are not available to traditional private student loan lenders.
  • Borrower complaints about state-based lenders mirror complaints about traditional for-profit private lenders. An analysis of thousands of complaints submitted by borrowers to the Consumer Financial Protection Bureau shows that many borrowers with state-backed private loans face similar challenges that borrowers experience with traditional private loans. Borrowers report struggling to access affordable payment plans despite their state-lender advertising flexible repayment options. Others report experiencing challenges releasing a cosigner and accessing support in the instance of sudden job loss.
  • State-based lenders use their state government affiliation to get special treatment under important state consumer protection laws, which make it harder for students to get justice and hold them accountable. Although state student lenders may offer similar products and borrower repayment experiences to borrowers as traditional private lenders, they don’t play by the same rules. Instead, many state agencies attempt to assert special protections and privileges, like sovereign immunity against borrower lawsuits and not being bound by statutes of limitations. Where courts have agreed, it’s much more difficult for borrowers to hold these lenders accountable in court when they engage in illegal activities, and to protect themselves from collection of very old debts. State-based lenders also lobby heavily for special treatment under state laws intended to protect student loan borrowers.

Further Reading

In Debt Substack post on “State Based Lender Attempts to Weaken Preferred Lender Anti-Corruption Rules”: Congress Wants to Make it Easier to Load Students Up with State-Based Private Student Loan Debt

Protect Borrowers report into the Private Student Loan Market: Access Denied: How 40% of Americans are Locked out of the Private Student Loan Market

Protect Borrowers blog on Private Student Loan Market: Access Denied: New Report Reveals 40% of Americans Are Locked Out of the Private Student Loan Market

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About Protect Borrowers

Protect Borrowers (formerly Student Borrower Protection Center) is a nonprofit organization led by a team of experts, lawyers, and advocates fighting to build an economy where debt doesn’t limit opportunity. We investigate financial abuses, take predatory companies to court, and push for policies to protect working people from debt traps. We aim to deliver immediate relief to families while building power, driving systemic change, and fighting for racial and economic justice.

Learn more at protectborrowers.org or follow us on social @BorrowerJustice.