Students and Education Access Should Not Be at the Mercy of Risky Credit Markets
By Ben Kaufman | January 22, 2025
Now that the 119th Congress has officially begun, the new Republican trifecta appears to have its sights on the federal student loan system. In particular, among a host of possible changes to higher education, Congressional Republicans have signaled their intent to gut certain federal student loan programs like the Graduate PLUS and Parent PLUS loans and impose harsh new borrowing limits that will make it harder for low-and-middle income students and families to pay for college. These proposed changes follow a drumbeat of recent calls from right-wing advocates to increase the role of private student loans in higher education finance, including Project 2025’s call for the “privatization of all lending programs including subsidized, unsubsidized, and PLUS loans (both Grad and Parent).” In addition, conservatives in D.C. are calling for watershed changes that could allow a new wave of low-quality programs to become eligible for federal student aid.
Of course, the federal student loan system has no shortage of serious and dangerous pitfalls, and this entire conversation is downstream of the need to eliminate debt-fueled higher education. But a spate of recent action from the Consumer Financial Protection Bureau (CFPB) underscores that private student loans are profoundly risky, such that a neoliberal turn for higher education access—with policymakers favoring reliance on private credit markets over robust federal and state financial aid capacity to maintain higher education access—would be hugely problematic:
- Private student loan companies are likely to serve only prime borrowers, leaving everyone else to fend for themselves. A simple fact of higher education financing (and one of the key reasons why the move to the Direct Loan system was necessary in the first place) is that mainstream creditors cannot be relied on to make student loans broadly and consistently available. Instead, these companies prefer to lend only to those who are already creditworthy (often through parental wealth), a process that critics have referred to as “skimming the cream off the top” of the student loan system. In some cases, banks such as Wells Fargo have simply refused to lend to entire demographics of students. When that happens, students’ options (if any) are limited to risky, subprime loans with unfavorable terms and features. One example of the type of loans that have historically come in to fill this gap are those that were ultimately packaged in a series of investment vehicles called the National Collegiate Student Loan Trusts (NCSLTs). These loans (many of which were made to students at for-profit colleges) were so high-cost that, in many cases, lenders knew they were doomed to fail. And when those failures arrived, creditors unleashed a decades-long debt collection campaign marked by illegal robo-signing tactics and the targeting of minority communities.
- Private student loan companies unfairly and illegally deny borrowers promised benefits. Private student loan companies have a long, unfortunate history of claiming that borrowers will be able to enjoy certain features of their loans, then aggressively hiding the ball when borrowers try to access those benefits. Industry conduct along those lines continue through to today. For example, CFPB examiners recently found that private student loan companies routinely and improperly deny borrowers relief they had been told they could access if they were to become totally and permanently disabled, use bait-and-switch tactics to withdraw protections for borrowers during unemployment, and outright lie about the availability of certain discounts.
- Private student loan companies illegally keep borrowers from accessing key anti-fraud protections. Private student loan companies regularly use tricky contract language and misleading or one-sided practices to deflect borrowers from wielding key consumer protections. For example, CFPB examiners recently found that private student loan companies implied to borrowers that they could not challenge student loans taken on to attend schools that had defrauded those borrowers, even though contract language required under the Federal Trade Commission’s “Holder-in-Due-Course-Rule” allowed borrowers to do exactly that. In addition, the same CFPB examiners found that private student loan companies did not faithfully consider claims that borrowers asserted under the Holder Rule, with some servicers considering borrowers’ claims “only if the borrowers retained attorneys.” Denial of these protections is disturbingly common across the private student loan space.
- Private student loan companies rob borrowers of their right to the clean slate of bankruptcy. The CFPB has long noted that private student loan companies commonly misrepresent to borrowers that private student loans are never dischargeable in bankruptcy, or that borrowers still have to pay on private student loans that have, in reality, already been discharged. However, that conduct appears not to have stopped. For example, in May of 2024, the CFPB sued the Pennsylvania Higher Education Assistance Agency, which services billions of dollars in private student loans, for falsely telling borrowers that they still owed payments on discharged loans and for improperly furnishing information about those loans to credit reporting companies.
- Private student loan companies are pushing new, even riskier products. If developments at the outer boundary of the private student loan market are any indication of market trends, then private student loan borrowers are in for only more harm and abuse. For example, the CFPB took action last month against the private student loan fintech lender Climb Credit for lying to students about the cost of their loans and about the quality of the programs that Climb directed students to take on loans to attend. Similarly, the CFPB took action last year against the coding bootcamp BloomTech (formerly “Lambda School”) and its founder, Austen Allred, for trapping students into private loans by lying about those loans’ costs, the quality of the school’s program, and plans that the company had to cash in by selling those loans off to investors. The CFPB also found that BloomTech violated the Holder Rule mentioned above by failing to include important anti-fraud protections in borrowers’ private student loan contracts.
The above is likely just the tip of the iceberg. The CFPB recently reported that private student loan borrowers are dealing with “improperly assessed fees, improperly denied deferment requests, frustration with ballooning balances, and misleading information during the origination and refinancing processes.” A growing, opaque, and lightly-regulated market of so-called “shadow student debt” — which include personal loans, lines of open-ended revolving credit, “Buy Now, Pay Later” debt, unpaid balances owed directly to schools, and several other consumer financial products tied to education and training demonstrate the growing risks for students and families in the private market. Plus, if the second Trump administration is anything like the first, a potential pivot toward private student loans is likely to be accompanied by political appointees defanging the federal government’s main consumer protection watchdog. The results will be even greater borrower hardship, and in particular hardship that is likeliest to fall on borrowers of color.
The verdict is clear. Lawmakers embracing a neoliberal turn for higher education by pushing students toward private loan markets would expose those students to massive, unnecessary risks.
This blog originally appeared on January 8, 2025, in The Brandeisian Brief and has been updated to reflect the most recent understanding of current reconciliation-related discussions on Capitol Hill.
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Ben Kaufman is a Fellow at Student Borrower Protection Center (SBPC). He previously worked as SBPC’s Director of Research & Investigations, and at the Consumer Financial Protection Bureau.