Journal / Essay · Debt

The Math of the Private Loan

Private student loans total $140 billion and carry almost none of a federal loan's repayment or forgiveness protections.

Two other pieces in this journal covered student debt broadly and for-profit college outcomes specifically. This one is about the loan type inside both: not federal Direct Loans, but the roughly $140 billion in private loans from banks and fintechs — Sallie Mae, Discover, SoFi, College Ave — carrying almost none of a federal loan's protections and almost all of a bank loan's rules.

And Then You're Dead · August 2026 · 8 min read

Federal and private student loans get filed under the same word — "student loans" — on a tax form and in most conversation. Legally, they're close to unrelated products. A federal Direct Loan is a benefit created by statute, with a fixed rate set by Congress and income-driven repayment and forgiveness programs built into the law. A private loan is a consumer credit product, underwritten by a bank to that borrower's risk, governed by whatever the promissory note says — full stop. Most of what makes federal debt survivable when life goes sideways doesn't exist on the private side, because no one wrote it into the contract.

A Smaller Market, a Harder Loan

Private loans are a minority of total student debt, but not a small one — and the underwriting looks nothing like a federal loan's.

That cosigner rate is the business model, not a fluke. A federal loan goes to an 18-year-old with no income or credit history because it's a benefit, not a bet. A private loan is a bet, and banks don't extend five-figure credit lines to teenagers without an established income behind the paper — meaning nearly every private student loan is actually two people's debt.

No Income-Driven Anything

The CFPB's Private Education Loan Ombudsman exists to compare what private borrowers get against what federal borrowers get. Its most recent annual report, published January 2026, states the gap plainly.

"Generally, federal student loans offer more protections and more flexibility for student loan borrowers regarding repayment options and terms, to include grace periods, deferments, forbearances, subsidized interest on some loans, repayment based on income, [and] loan discharge or cancellation." — CFPB Private Education Loan Ombudsman, January 2026

Translated: no private-loan equivalent of income-driven repayment, no Public Service Loan Forgiveness no matter the job, and no statutory deferment or forbearance menu — private lenders aren't bound by the Higher Education Act, so hardship relief is whatever that lender chooses to offer, and it can say no. The report's own bottom line: exhaust federal loan eligibility first.

The Cosigner Is the Loan

Because almost every private undergraduate loan has a cosigner, what happens to that second person matters as much as what happens to the student — and for years, it mattered in a specific and brutal way.

In April 2014, the CFPB found private lenders routinely placing loans into automatic default the moment a cosigner died or filed bankruptcy — even with the primary borrower current — triggering a demand for the full balance and a credit-report hit regardless of that borrower's own record. After CFPB pressure, several of the largest private lenders committed to stopping the practice, new and existing loans alike. That didn't rewrite every contract in the market, and the clause has kept surfacing in complaints since — less common now, not extinct.

The other side is release: after enough on-time payments, a borrower can apply to have the cosigner dropped. The CFPB found roughly 90 percent of applications rejected, often with no explanation of which requirement wasn't met — so a cosigner should expect to stay on the loan for its full term, not the two or three years the marketing implies.

Bankruptcy Isn't a Clean Exit, But It's Less Closed Than It Was

The reputation of student debt as "impossible to discharge in bankruptcy" is close to true for a private loan, but not quite as absolute as it used to be.

Most private loans still count as "qualified education loans," meaning a borrower must clear the Brunner test: prove they can't maintain a minimal standard of living while repaying, that this will persist through much of the loan's term, and that they've made good-faith repayment efforts already. Courts long applied that standard so strictly — some demanding near "certainty of hopelessness" — that filing was widely seen as pointless. That's shifted somewhat: courts have moved off the harshest readings, and in November 2022 the Department of Justice told its attorneys in federal loan cases to stop contesting discharge by default and evaluate each case on its facts — a shift that has influenced how private lenders litigate the same standard, though the guidance binds only DOJ. Separately, the Second Circuit ruled in Homaidan v. Sallie Mae (2021) that loans paid straight to the borrower, not certified and sent to the school, may not count as "qualified education loans" at all — dischargeable as ordinary debt, no hardship showing required, though almost no one knows which category their loan falls into without a lawyer reading the note.

Rates That Move While You're Still Paying

Federal loan rates are fixed by statute for the loan's life. Most private lenders offer a variable-rate option instead, and borrowers often take it because the starting rate looks lower.

A variable-rate private loan is pegged to a benchmark, typically the 30-day average SOFR, plus a margin set by the borrower's credit profile at origination. The rate resets periodically over the life of the loan — a decade or more, for a typical term — and industry contracts commonly cap it around 17.95% unless state law requires lower. None of that is tied to the borrower's income or ability to pay; it moves with the benchmark regardless of what's happening in that borrower's life, and the rising charge-off rate above suggests more borrowers are feeling it.

The Loan Gets Sold, and Sometimes the Buyer Can't Prove It

A private loan rarely stays with the company that made it. Lenders routinely bundle loans into pools and sell them to investors through securitization, and a loan signed with one name on the paperwork can end up owned and serviced by an entirely different one within a year or two. Between 2001 and 2007, a group of fifteen trusts known as the National Collegiate Student Loan Trusts acquired more than 800,000 private student loans this way, with an original principal above $15 billion.

In September 2017, the CFPB filed an enforcement action against Transworld Systems, the debt collector working the Trusts' defaulted accounts, alleging its staff had signed sworn court affidavits attesting to personal knowledge of a borrower's account history and the chain of paperwork proving the Trusts actually owned that specific debt — without having reviewed the underlying records, in lawsuits already filed against borrowers. Some of the affidavits weren't even notarized. Transworld agreed to a $2.5 million civil penalty and was ordered to stop the practice. The parallel case the CFPB filed the same day against the Trusts themselves took a longer, messier path: after years of litigation over whether an earlier proposed settlement had been properly authorized, the CFPB and the Trusts jointly moved to dismiss that case in April 2025, closing it without a final ruling on the underlying claims.

What the Transworld finding established stands regardless of how the larger case ended: a debt buyer suing over an old loan doesn't automatically have the paperwork to prove it owns what it's suing over, and for years, some didn't let that stop them from suing anyway. It's not a defense advertised anywhere in a loan's original terms, and most borrowers who get served with a collection lawsuit never learn it exists unless a lawyer who's seen the pattern before happens to ask the plaintiff to prove its chain of title.

And Then You're Dead

None of this makes a private loan worthless — for some families it's the only way to close a financing gap federal aid didn't cover, and most private borrowers keep paying it off without incident. But it's a different legal animal than the debt discussed elsewhere in this journal, and the difference runs almost entirely one direction: no income-driven repayment, no forgiveness track, a cosigner exposed for the full term whether or not release ever gets approved, a bankruptcy standard only recently starting to bend, and a rate that can climb for reasons that have nothing to do with the person paying it. Every one of those terms was written by the lender, into a contract most 18-year-olds and their cosigners sign once and never read again.

That's it. That's the whole thing.

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