Key points
Most of the $1.65 trillion that Americans owe in student debt is owed to the federal government. A smaller slice, around $145bn, sits with banks, credit unions, state agencies and specialist lenders. That private slice has spent fifteen years in the shadow of the federal programme. It is now moving into the light.
The reason is policy. From July 2026 the federal government stopped offering Grad PLUS loans to new graduate students and capped what parents and graduates can borrow. Families still need to pay tuition, so more of that bill will be financed privately. For investors, a market that has been steady and somewhat overlooked is about to grow, and it will need funding.
This guide explains what private student loans are, how they perform, how investors can get exposure and what to watch as the market expands.
What are private student loans?
Private student loans are education loans made by banks, credit unions, state-affiliated lenders and non-bank lenders rather than by the US Department of Education. They fill the gap between the cost of attendance and what federal loans, grants and family savings cover.
The difference from federal loans is fundamental. Federal loans are made to almost any eligible student without a credit check, and come with income-driven repayment, deferment and, in some cases, forgiveness. Private loans are underwritten like other consumer credit: credit score, income and debt-to-income all count, and most borrowers need a co-signer, usually a parent. Terms are set in the loan contract, and the lender's remedies are those of any private creditor.
| Feature | Federal student loans | Private student loans |
|---|---|---|
| Lender | US Department of Education | Banks, credit unions, state agencies, non-banks |
| Credit check | None for most loans | Yes, usually with a co-signer |
| Pricing | Rate set by statute, same for all | Risk-based, fixed or variable |
| Repayment relief | Income-driven plans, deferment | Limited, at lender's discretion |
| Collection tools | Wage garnishment and tax offset without a court order | Court judgment usually needed |
| Investable by private capital | Only legacy FFELP loans | Yes: whole loans, SLABS, lender finance |
How big is the private student loan market?
Protect Borrowers puts outstanding private student debt at about $144.9bn at the start of 2025, around 8% of all US student debt. The same report shows private lending rising from 9.4% to 13.5% of new student loan originations between the 2014–15 and 2024–25 academic years.
New lending runs at roughly $10.8bn a year. Enterval Analytics, which tracks the largest private lenders, recorded $10.81bn of originations in the 2024–25 academic year, with the first quarter of 2025–26 up 7.6% on the year before. Sallie Mae is the dominant lender: the American Enterprise Institute notes it originated $7.4bn in 2025 and holds about two-thirds of the market.
The figures that matter most for investors sit underneath the totals.
How do private student loans perform?
Private student loans have historically performed well for unsecured consumer credit, largely because of who borrows. Enterval's data shows 94.3% of 2025–26 originations to date were co-signed, rising to almost 97% for undergraduates. A co-signer is a second person fully liable for the debt, usually with an established credit history.
The trend has softened. In the third quarter of 2025, annualised gross charge-offs reached 2.71% of loans in repayment, up from 2.47% a year earlier and above the 2017–2019 average of 2.04%. Loans 90 or more days past due rose to 1.71%. Refinance loans show the same direction: Morningstar DBRS data, summarised in our Q3 2025 Alt Lending investor report, showed 30-day-plus delinquencies on refinance SLABS at 1.45% in the second quarter of 2025, up from 0.78% a year earlier. These remain manageable levels, but the direction is a reminder that underwriting quality varies by lender and by vintage.
Bankruptcy treatment also supports recoveries. Most private student loans can be discharged only if the borrower proves "undue hardship", a test few meet, which makes them harder to shed than credit card or personal loan debt. The protection is not absolute: some loans that fall outside the statutory definition of a qualified education loan have been held dischargeable, so investors should check what they are buying. We cover this in more detail in our guide to student loan asset-backed securities.
Why institutional capital is moving in
Large credit investors have already decided this is an asset class worth owning. In 2024 Discover agreed to sell its $10.1bn private student loan portfolio to funds managed by Carlyle and KKR. In November 2025 Sallie Mae launched a strategic partnership with KKR under which KKR's asset-based finance funds are expected to buy at least $2bn of new private student loans a year for an initial three years, with Sallie Mae keeping the customer relationship and servicing.
Federal policy adds a second driver. The One Big Beautiful Bill Act ended Grad PLUS for new borrowers from 1 July 2026 and introduced caps of $20,500 a year for most graduate programmes and $50,000 a year for professional degrees. KBRA estimates the resulting funding gap at around $10–12bn a year, while cautioning that not all of it will become private lending. AEI makes the same point: private lenders are unlikely to serve borrowers with thin or weak credit files, so growth will be real but partial. The detail of the policy changes is set out in our analysis of US student loan policy in 2026.
How investors get exposure to private student loans
There are four main routes, each with a different risk.
- Whole loans and forward flow: buying loans directly from an originator, either as a one-off portfolio or through a commitment to buy new loans as they are made, as KKR has done with Sallie Mae. This route suits large investors with the capacity to oversee servicing.
- Student loan ABS: buying rated notes from a securitisation of private or refinance loans. This is the most liquid route and allows investors to choose their position in the capital stack.
- Lender finance: providing senior secured facilities to non-bank student lenders, secured on their loan books. The investor sits ahead of the lender's own equity and relies on borrowing base limits and eligibility criteria. This is the approach we take across specialty lending at Kingsbury & Partners, and it is explained in our guide to funding for lending.
- Distressed and re-performing loans: buying defaulted loans at a deep discount and working them back to payment. Returns depend on recovery rather than coupons, and the strategy is covered in our guide to investing in distressed private student loans. Alt Lending, a US specialist in this segment that works with servicers such as Zuntafi, is one example; Kingsbury & Partners has partnered with Alt Lending through two senior secured facilities.
Key risks of investing in private student loans
- Credit risk: borrower and co-signer incomes drive repayment, and charge-offs have risen from their lows.
- Underwriting drift: as lenders chase the graduate gap, standards may loosen. New lenders and new programmes have no performance history.
- Policy and conduct risk: federal rules, state licensing and consumer protection enforcement can change how loans are made and collected.
- Prepayment risk: strong borrowers refinance when rates fall, shortening the life of higher-yielding loans.
- Liquidity: whole loans and lender facilities are held to maturity. Only rated ABS trade with any regularity.
- Servicer risk: collections and borrower contact depend on the servicer, whose performance can decline slowly and then quickly.
What this means for investors
Private student loans offer allocators exposure to a well-documented consumer credit market with strong borrowers, co-signers and legal protections that most unsecured lending lacks. The asset class is about to grow, because federal policy has pushed part of graduate financing to the private market and the lenders filling that gap will need capital.
For family offices and wealth managers, the useful questions are where in the chain to sit and how much protection that position offers. Senior secured lending to specialist lenders and senior tranches of rated securitisations put a large equity cushion between the investor and first losses. Distressed strategies offer higher potential returns with a different set of risks. Whichever route is chosen, the quality of the originator, the servicer and the legal documentation will decide the outcome more than the headline yield. Those looking at the wider category can read our guide to consumer debt as an asset class.
Frequently Asked Questions
How big is the US private student loan market?
About $144.9bn was outstanding at the start of 2025, roughly 8% of the $1.65 trillion in total US student debt, with around $10.8bn of new private loans made each year.
How are private student loans different from federal loans?
Private loans are credit-underwritten, usually co-signed and priced on risk, with limited repayment relief. Federal loans are made without credit checks and come with income-driven repayment and the government's own collection powers.
Are private student loans a good investment?
They can be for investors who understand consumer credit. Co-signers and limited dischargeability support performance, but returns depend on underwriting, servicing and where the investor sits in the structure.
Can private student loans be discharged in bankruptcy?
Usually only if the borrower proves undue hardship, which is rare. Some loans that fall outside the legal definition of a qualified education loan have been held dischargeable.
How can investors invest in private student loans?
Through whole-loan or forward-flow purchases, student loan asset-backed securities, senior secured facilities to non-bank student lenders, or distressed loan strategies.
What does the end of Grad PLUS mean for private student lenders?
New graduate borrowers lost access to Grad PLUS from July 2026 and face lower federal caps, which KBRA expects to create a $10–12bn annual funding gap that private lenders will partly fill.