Federal Student Loan Changes Fuel Private Lending Growth as Credit Risks Mount

Changes to federal graduate student loan programs are accelerating growth in private education lending, with Sallie Mae, Navient, and SoFi reporting substantial increases in loan originations during the third quarter of 2026. The shift follows new federal borrowing restrictions that took effect July 1, creating additional opportunities for private lenders while raising questions about credit risk, repayment performance, and future collection activity.

The emerging trend is particularly relevant to the receivables management industry as private lenders expand their portfolios while managing rising charge-offs and delinquency concerns among existing borrowers.

Federal Student Loan Restrictions Push Borrowers Toward Private Lenders

Under federal student loan changes enacted through the 2025 budget reconciliation law, the Grad PLUS program is no longer available to most new graduate and professional student borrowers beginning July 1, 2026.

Previously, eligible graduate students could use Grad PLUS loans to finance educational expenses up to their school’s cost of attendance, minus other financial assistance. The program provided a federal borrowing option for students pursuing expensive degrees in fields such as medicine, law and business.

According to Federal Student Aid’s updated borrowing guidance, the new limits generally include:

• Graduate students: $20,500 annually in federal Direct Unsubsidized Loans, with a $100,000 aggregate graduate borrowing limit for students who have not previously been professional students.
• Professional students: $50,000 annually, with a $200,000 combined graduate and professional borrowing limit.
• Grad PLUS loans: Unavailable to new borrowers, subject to a limited exception for qualifying students already enrolled and borrowing before July 1, 2026.

Students who qualify for the transitional exception may continue accessing Grad PLUS loans for the shorter of three academic years or their remaining program length.

For students whose educational expenses exceed the new federal limits, private student loans represent one potential source of additional financing. Unlike federal student loans, private loans generally rely more heavily on creditworthiness, income, and cosigner qualifications.

Private Student Loan Originations Surge Following Federal Changes

The effects of the borrowing restrictions are becoming visible in private lenders’ financial results.

According to Sallie Mae’s third-quarter earnings report, the company originated $3.4 billion in private education loans, a 15% increase from the same period in 2025.

Graduate student loan originations increased 119%, reaching approximately $1.4 billion.

Sallie Mae CEO Jonathan Witter attributed the company’s growth in graduate lending to changes in federal student loan programs. The company described the quarter as its largest ever for originations.

Navient also reported significant lending growth through its Earnest business. Total consumer loan originations reached approximately $1.4 billion, increasing 77% year over year. Of that amount, $870 million came from student loan refinancing and $479 million from in-school education lending, with the latter increasing 84%.

Meanwhile, SoFi reported a record $2.9 billion in quarterly student loan originations, a 96% increase from the previous year.

SoFi’s business differs from that of traditional in-school lenders because much of its student loan activity involves refinancing existing education debt. Its results therefore reflect broader private student lending demand rather than exclusively new graduate borrowing.

Taken together, the figures show substantial expansion across private student lending, although not all reported growth can be directly attributed to the federal borrowing changes.

Lending Growth Accompanied by Rising Credit Costs

Despite higher originations, private student lenders are facing challenges related to credit losses, funding costs, and loan portfolio performance.

Sallie Mae reported a $32 million net loss during the third quarter, compared with $136 million in net income during the same period in 2025.

The company recorded a $214 million provision for credit losses, up from $179 million a year earlier. The increase partly reflects accounting requirements that recognize expected credit losses when new loans are originated.

Sallie Mae also reported approximately $90 million in net charge-offs and cited problems associated with certain third-party debt resolution practices.

According to the company, some borrowers with the financial ability to repay their loans are entering delinquency and default after engaging third-party debt resolution providers. Sallie Mae said these practices have affected its recovery strategies and contributed to higher losses.

Navient reported similar challenges within portions of its existing private student loan portfolio.

The company recorded a $178 million provision associated with legacy private education loans as elevated delinquencies and charge-offs persisted longer than anticipated. It also recorded additional provisions related to older refinance loans.

These developments illustrate an important distinction between rising student loan demand and improving credit performance. Originations may expand while lenders simultaneously experience higher losses on previously issued loans.

Private Student Lending Creates New Risks for Borrowers

The transition toward private financing introduces additional considerations for borrowers who previously could have relied more extensively on federal programs.

Federal student loans generally provide standardized repayment protections, including access to applicable income-driven repayment programs and certain discharge or forgiveness provisions.

Private student loans typically offer fewer federally mandated repayment protections. Available hardship assistance, deferment options, and repayment modifications depend on the lender and individual loan agreement.

Private lenders also evaluate applicants using underwriting criteria that can affect loan accessibility.

Sallie Mae reported that approximately 92% of its new private education loans involved cosigners, with an average FICO score of 757 at approval.

Navient’s new in-school borrowers reportedly averaged a FICO score near 770.

These figures suggest lenders are prioritizing borrowers with stronger credit profiles, potentially limiting financing options for students unable to qualify independently or secure a creditworthy cosigner.

Interest rates can also vary considerably depending on borrower qualifications. Students who do not qualify for competitive private loan terms may face substantially higher borrowing costs.

What the Shift Means for Student Loan Collections

For the receivables management industry, the expansion of private education lending could gradually change the composition of student loan portfolios entering servicing, delinquency management, and collections.

Several developments warrant attention.

• Greater private loan exposure: As federal borrowing limits redirect some education financing toward private lenders, additional repayment obligations will fall under private lending agreements rather than federal student loan programs.
• Different collection requirements: Private student loans remain subject to applicable federal and state consumer protection laws, including the Fair Debt Collection Practices Act when collection activity falls within its coverage. They do not automatically carry the same repayment, collection, or discharge framework as federal student loans.
• Portfolio performance concerns: Rising charge-offs on existing private student loans may increase demand for early-stage delinquency management, repayment assistance, recoveries and portfolio servicing.
• Debt resolution practices: Sallie Mae’s concerns about borrowers entering default after engaging certain third-party debt resolution providers highlight the importance of distinguishing legitimate refinancing and hardship assistance from debt settlement arrangements that require borrowers to stop making payments.
• Potential secondary market activity: Continued private student loan growth may also influence loan sales, portfolio acquisitions and servicing transfers, particularly if lenders seek to manage balance sheet exposure or improve liquidity.

However, the increase in originations does not necessarily indicate an immediate increase in collection placements. Many newly originated education loans will remain in school or deferment status before entering repayment.

Student Loan Financing Shift Could Reshape Future Receivables Portfolios

The first financial results following the federal borrowing changes indicate that private lenders are capturing additional graduate education financing demand.

At the same time, rising credit loss provisions, elevated defaults within older portfolios and tighter underwriting standards demonstrate the challenges associated with expanding private education lending.

For creditors, servicers, debt buyers and collection agencies, the longer-term significance will depend on how these newly originated loans perform as borrowers complete their education and begin repayment.

The transition also creates a developing distinction within the student loan market: Federal student loan collection activity is returning under its own regulatory and servicing structure, while a growing portion of new graduate education financing may eventually enter the private receivables market.

As lenders continue adjusting to the federal borrowing restrictions, origination quality, repayment outcomes, and portfolio performance will be important indicators of how the private student loan market develops.