By Steve Cocheo, The Financial Brand
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A multi-billion-dollar new lending opportunity, with the potential for establishing deep and long-term new consumer relationships, arrived in early July, courtesy of the “Big Beautiful Bill.”
How many lenders will actually take advantage of this development? That remains to be seen: Experts agree that student lending is not something neophytes can (or should) get into quickly nor at scale.
Need to Know:
- Washington’s student loan portfolio stands at around $1.7 trillion, according to the Education Department. Under the latest changes, a big chunk of that will migrate over time to the private sector.
- Student lending is a political football, and future changes at the White House may demand nimble planning on lenders’ part.
- For a private lender, an education loan, especially for a graduate or professional degree, is in part an investment in the future earnings potential — and repayment ability — of a degree in a particular field and from a particular school.
- What it’s all about: The new opportunity results from major changes made to federal student lending programs by last year’s law and implemented by the Department of Education.
The bill, which picked up the official moniker, “Working Families Tax Cuts Act” along the way, kills a major federal graduate student loan program as of this year, with a phase-out for current borrowers. In addition, more-stringent limits on an individual’s federal student debt borrowing overall are taking effect.
The Trump administration has argued that these steps will force colleges and universities to contain their costs and make education more affordable, while getting the government further out of the student lending business.
Key insight: In practice, the federal policy shift is pushing a huge amount of credit demand into the private sector.
“There are going to be a lot more students who have needs and those needs will be unmet by federal programs,” says Joshua Turnbull, SVP and consumer lending business leader at TransUnion. “That creates an opportunity for private lenders to enter the fray.”
Chris Hahn, head of consumer healthcare and student lending at KeyBank, puts the sea-change in perspective:
“The federal government doesn’t underwrite credit quality. There is no use of credit scores nor debt-to-income ratios. There is no, ‘What is your credit profile? What is your past performance?’ But for private lenders, and traditional bank lenders, credit quality matters.”
About half of the demand that’s coming will be readily bankable, Hahn estimates. The other half? Under current conditions, not so much.