Introduction

As the cost of higher education continues to climb, private student loans have become a critical financing tool — and, increasingly, a distinct institutional asset class within private credit. For investors, these loans offer contractual cash flows, resilient demand dynamics, and diversification away from mainstream corporate credit. Their role is expanding from niche exposure to a recognised component of sophisticated private credit portfolios.

This insight examines the structural features, market size, and evolving trends of private student loans, with a focus on the US market, and assesses their appeal — and risks — for institutional allocators.

A Growing Market Underpinned by Structural Demand

The private student loan market is expanding, primarily because government-backed programmes do not fully cover tuition and living expenses. The result is a consistent funding gap increasingly filled by private lenders.

  • Market Growth: Global private student loan issuance is projected to surpass $20bn annually by 2028, with the US leading the sector.
  • Investor Interest: Private equity and credit platforms are entering the space. KKR’s recent acquisition of a loan servicer underscores the institutionalisation of this market.
  • Loan Features: Typically structured with fixed or variable rates, grace periods, and borrower-tailored repayment schedules, private student loans provide higher yields to lenders and steady income streams for investors.

This blend of social necessity and financial utility creates a long-term growth story that is less cyclical than many consumer credit categories.

The US Market: Scale, Structure, and Resilience

The United States is by far the largest market, with $140bn in outstanding private student loan debt as of 2024, roughly 7% of the $1.7 trillion total US student loan market.

Bankruptcy-Remote Status
A unique feature of US student loans is their limited dischargeability in bankruptcy. This “bankruptcy-remote” structure enhances recovery expectations and offers investors downside protection not typically found in unsecured consumer credit.

Default Rates
Private loans consistently outperform federal loans on credit quality. Defaults average ~2% compared with ~9% for federal loans, reflecting stricter underwriting and co-signer requirements.

Market Dynamics
Growth is supported by rising enrolments in postgraduate programmes, where private loans often dominate. Average balances stand near $33,000, with graduate loans considerably higher. This concentration in higher-income borrowers contributes to the sector’s historically lower default rates.

Investor Appeal: Yield, Diversification, and Resilience

  • Yield Premiums: Private student loans typically deliver 4–7% yields, depending on credit tier and repayment terms, outpacing many public fixed-income benchmarks.
  • Resilience in Downturns: Demand for education — and thus loans — is countercyclical. Enrolment often rises during recessions, supporting loan volumes even as other consumer credit categories weaken.
  • Diversification: Returns are largely uncorrelated to equities and traditional credit, enhancing portfolio efficiency for multi-asset allocators.

These characteristics position private student loans as a complement to both traditional fixed income and more mainstream private credit strategies.

The Opportunity in Distressed and Delinquent Loans

Beyond performing portfolios, some of the most compelling opportunities in this asset class lie in distressed and delinquent private student loans. These are loans where borrowers have defaulted or fallen into arrears, often trading at deep discounts to face value in secondary markets.

For specialist managers, this segment offers two distinct advantages:

  • Discounted Acquisition Costs: Portfolios of defaulted loans can be purchased at a fraction of their principal balance — in some cases as low as 6–8 cents on the dollar. Even modest recoveries can generate outsized returns relative to acquisition price.
  • Multiple Recovery Channels: Specialist servicers focus on loan rehabilitation, restructuring, or settlement, turning previously non-performing loans into reperforming assets that can later be sold at 70–90% of par.

This strategy requires specialist expertise in servicing, collections, and restructuring, but when executed well it provides investors with high risk-adjusted yields that are largely uncorrelated to public markets.

Alt Lending is one such specialist, actively acquiring distressed, defaulted, and delinquent US private student loans. By combining disciplined pricing with partnerships with dedicated servicers such as Zuntafi, the firm is capitalising on inefficiencies in a fragmented market. Their approach demonstrates how managers can unlock value from assets often overlooked by mainstream credit funds.

For institutional investors, distressed student loan portfolios represent a differentiated sleeve of private credit — one that sits outside crowded mid-market lending and offers contractual recovery potential anchored by education’s enduring demand profile.

Key Risks: Not Without Complexity

  • Credit Risk: Income volatility, inflation, and macro headwinds can impair borrower repayment capacity.
  • Regulatory Uncertainty: Political debate around debt forgiveness or consumer protections could alter repayment trends.
  • Liquidity: Secondary markets exist but are thin, making direct exposure less liquid than corporate credit or securitised consumer debt.

While risks are real, disciplined underwriting and structured approaches — including securitisation and Credit Linked Notes (CLNs) — can mitigate them, offering institutional-grade exposure with transparency and governance.

Integration into Private Credit Portfolios

Private student loans are increasingly seen as a specialist sleeve within private credit allocations. They provide predictable cash flows, diversification from mid-market corporate credit, and opportunities for structured yield enhancement.

Recent advances in AI-driven underwriting and loan servicing are improving credit assessment and recovery rates, further institutionalising the sector. Investor activity — from specialist managers like Alt Lending to global players like KKR — demonstrates a growing consensus: private student loans are a scalable, investable asset class.

Partnering with Kingsbury & Partners

At Kingsbury & Partners, we identify and structure opportunities in emerging corners of private credit — including private student loans. Through rigorous due diligence, governance frameworks, and partnerships with specialist originators, we ensure institutional investors can access this asset class with confidence.

Whether you are seeking uncorrelated yield, diversified exposures, or structured entry into niche markets, our platform provides the pathway.

Conclusion

Private student loans combine structural demand, attractive yields, and resilience to economic cycles. While regulatory uncertainty and liquidity constraints must be carefully managed, the sector’s scale and stability position it as an increasingly important component of institutional private credit portfolios.

For allocators willing to look beyond crowded mid-market lending strategies, private student loans represent both diversification — and opportunity.