Looking Backward or Looking Forward? Exploring the Private Student Loan Market

The existing private student loan market is largely “backward-looking”: lenders make loans based on credit scores and the availability of a cosigner rather than the student’s potential and/or the expected value of a program or institution.

Students with high potential who lack a credit history or a creditworthy cosigner are likely excluded from the current market. More than 90 percent of undergraduate loans are cosigned, and low-income borrowers are less likely to rely on private loans than higher-income peers, even when they face similarly high net prices.

An emerging subset of innovative lenders use underwriting models with “forward-looking” criteria: completion rates, program quality, graduate earnings, and return on investment. These lenders extend credit based on a student’s potential, not their past, which could inject much-needed market discipline into the sector.

Policymakers who wish to promote forward-looking loan underwriting models should clarify how fair lending laws may relate to these models, collect and report additional data on program-level student outcomes, cap federal PLUS loans, and avoid using federal loan guarantees to entice private involvement.

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