With Republicans ending the Grad Plus program, private lenders are eyeing billions in new business, while some students could be left in the cold.
In the 22 years since Ken Ruggiero jumped from tech to the private student loan business, he’s lived through a dramatic boom and bust. In the early 2000s, the market more than quadrupled, fueled by soaring college prices and federal subsidies in the form of loan guarantees. Then Uncle Sam decided to do the lending itself, directly, and private loan originations collapsed from more than $20 billion in 2008 to less than $6 billion in 2011. Since then, they’ve grown at a glacial pace to $13 billion a year, prompting one big bank after another to exit the business.
Now Ruggiero and other industry players are getting ready for a new private student loan boom, courtesy of President Donald Trump’s and Congressional Republicans’ One Big Beautiful Bill Act (OBBBA), which aims to save $307 billion over the next decade from the student loan program. The law makes paying back government loans more onerous, caps the amount parents can borrow and eliminates the Grad Plus loan program for students beginning their graduate studies after July 1, 2026.
While undergraduates have always been limited in the amount they can borrow from Uncle Sam, since 2006, grad students have been able to borrow up to their full cost of attendance (including tuition, fees, housing, food and books) for as many years as their studies took, thanks to Grad Plus. But new PhD and master’s students will be limited to borrowing $20,500 per year ($100,000 over the life of their studies) from the government, while new entrants in medical, dental, law and other professional programs will be capped at $50,000 a year (and $200,000 over their lives).
That’s left the private sector a big hole to fill. The median four-year cost of attendance at a private medical school was $390,848 for the class of 2025–in other words, nearly double what future enrollees will be able to borrow from Uncle Sam. Even back in 2019-2020, 73% of dental students who took loans borrowed more than $50,000 a year. Roughly one third to 40% of grad students will need additional nongovernment financing after the caps take effect, says Jordan Matsudaira, who was chief economist and deputy undersecretary for Biden’s Department of Education and is now a professor and co-director of a higher education research center at American University.
That’s a dramatic shift. Market leader Sallie Mae told investors that the federal loan limits could eventually add $4.5 to $5 billion annually to its loan originations, which totaled $7 billion in 2024. Other publicly traded companies in line to benefit include SoFi and Navient.
Another big winner could be 11-year-old fintech College Ave, which now trails only Sallie Mae in the origination of in-school loans. Joe DePaulo, its CEO and cofounder, figures less than $2 billion of the $40 billion a year in grad schools loans are now made by private lenders and that they could, in total, pick up $10 billion in annual graduate business, plus an extra $1 billion to $1.5 billion or so of loans to parents of undergraduates, who had been allowed to borrow up to the full cost of attendance from Uncle Sam. After July 1, 2026, they’ll be limited to borrowing $20,000 per dependent student per year, with a lifetime cap of $65,000 per child. In other words, he sees the market for loans to conventionally creditworthy student loan borrowers growing from $13 billion to $24 billion once the changes are fully phased in–probably not enough to lure back the big banks, but plenty of growth for the specialized lenders.
College Ave CEO Joe DePaulo predicts Congress’ cuts will lead to $11 billion in new borrowing a year from private student lenders.
College Ave
Then there’s Ruggiero and his 10-year-old Ascent Funding. Other players, he says, are focused on lending to credit worthy grad students, or those with a parent ready to cosign—some 93% of private student loans originated last school year had cosigners, according to Enterval Analytics. But Ruggiero also aims to serve borrowers who would otherwise be left behind by setting up risk sharing deals with graduate schools keen to keep up their enrollment or even gain market share. “We already have the documents, we already have the systems, we already have our bank partners equipped,” Ruggiero says. On a recent Friday afternoon, 110 participants joined a webinar Ascent hosted to explain its approach to prospective law school partners.
It remains to be seen how many universities will put their money behind the value of their degrees and to what extent the new government loan restrictions might instead lead to fewer graduate students, particularly from families of limited means.
Grad Plus was an obvious target for Republicans. While grad students make up just 21% of borrowers, they’ve been sucking up 47% of federal loan dollars and more than a fifth finish their degrees with $100,000-plus in federal grad school debt, according to an analysis by Matsudaira. The biggest borrowers are future lawyers, doctors, pharmacists and dentists, but more than 1,400 of those earning a master’s in social work each year have racked up six figures of grad debt. In part due to Grad Plus, since 2000, the number of Americans with graduate degrees has more than doubled and a growing number of jobs require (or are easier to get with) the added credential. The demise of Grad Plus could arrest that trend—which may, or may not, be a good thing.
The most common argument against Grad Plus? It has “basically allowed institutions free rein to increase their cost of attendance wildly beyond typical levels of inflation,” declares Beth Akers, a senior fellow at the conservative American Enterprise Institute. A 2018 analysis found that the net cost of tuition and fees in master’s degree programs (that is, the cost minus grant aid from the school), has been rising faster than for undergraduate programs. A 2023 study of Texas’ public and private graduate programs concluded Grad Plus led to higher tuition prices and more student debt, without increasing the presence of underrepresented groups in graduate programs, as Plus backers hoped it would.
Moreover, Grad Plus loans aren’t exactly a bargain, especially in today’s high-interest rate environment–the fixed interest on new loans is currently 8.94%, compared to 7.94% for capped direct loans for grad students (which will soon be their only federal option) and 6.39% for capped direct loans for undergrads. The Plus loans also carry an onerous origination fee of 4.228%, compared to 1.057% for the capped loans. While the federal government does conduct a credit check for Grad Plus loans (rejecting those with recent serious delinquencies, defaults, tax liens or bankruptcies) it charges everyone the same rate. That’s why private loans can actually be cheaper for the best credit risks—current advertised rates range from just under 3% to 18%, though some have variable interest. In fact, the higher fixed rate on Grad Plus loans has meant that in addition to the small in-school market, lenders like fintech Earnest and SoFi do a nice refinancing business—once, that is, students have graduated and are earning good salaries.
Already, the impending end of Grad Plus is causing some students to rethink their educational plans. Jasel Steinmetz just graduated from University of California-Berkeley (Forbes’ top-ranked public college) with a triple major in political science, legal studies and Spanish and no debt—thanks to an academic scholarship and federal Pell grants for lower income students. Shaped by her mother’s and her own experience of domestic abuse, she was aiming for a career in international human rights law and planned to earn a master’s in international affairs before law school. But with the average cost of a JD more than $217,000, Steinmetz worries she will exhaust her federal loan options if she earns a master’s first. Now, she’s hoping to work and save up enough to apply to law school by 2027. “I think the hardest part has really been having planned to pursue this path and then having to restructure it right as I’m graduating,” she says.
What about private loans? Steinmetz says she doesn’t have a co-signer. Advocates say it’s low-income students like Steinmetz and those planning public interest careers who could be shut out. Even after the reforms in OBBBA, federal borrowers can still make payments based on their income and receive forgiveness after 30 years, or 10 years if they’re working for the government or not-for-profits. Private lenders expect to be paid back in a timely fashion.
“The possibility for a lot of interrupted educational pathways to happen are pretty real,” says Matsudaira. But conservatives don’t see that as a problem. “When you go to apply for a mortgage, the financier is going to not approve you for a mortgage that’s beyond your financial means to repay,” says Akers of the AEI. “We’re also denying access to unaffordable debts in the future.”
Consumer advocates also worry about potential private lending abuses, particularly since the Consumer Financial Protection Bureau (CFPB), which has policed the student loan industry, has been hobbled by the Trump Administration. “When you have an entire market that sees this as an opportunity to just capitalize and profiteer off of people’s educational dreams, that is a recipe for disaster,” warns Aissa Canchola Bañez, policy director at Protect Borrowers, formerly the Student Borrower Protection Center.
Rick Castellano, a Sallie Mae spokesman, responds that the consumer protection regulations that govern its student loans in some cases go “above and beyond what’s required of federal student loans.” And to be fair, the recent administration of Uncle Sam’s loans has been a mess.
For half a century, Sallie Mae has been synonymous with student loans. Created by Congress in 1972 to originate and service federally guaranteed student loans, it was fully privatized in 2004. The $1.8 billion (2024 revenue) company now controls a majority of the private student loan market. “This is a fundamental change in the way that graduate students and graduate schools will fund their higher education,” CEO Jonathan Witter told investors in a July 24th earnings call. “It allows us to serve customers and compete for business that was simply not available to us before.”
But there’s a hungry competitor on Sallie Mae’s heels: College Ave, which originated over $2.5 billion in student loans last year. Sallie Mae veterans Joe DePaulo and Tim Staley cofounded the fintech in 2014 as banks were heading for the exits. CEO DePaulo says the pair saw a chance to revamp an industry that wasn’t using data well, delivered a poor customer experience and was mostly financed on bank balance sheets. “We saw something that looked, believe it or not, like the credit card business in the late eighties and early nineties,” he tells Forbes. Their bet has paid off. With just 90 employees, College Ave now has about $10 billion in loan assets under management (it sells off the loans it originates, but services them). Since 2022, it has been majority owned by Thrivent Financial, the big mutual insurance and securities firm, which buys some of the loans. DePaulo sees plenty of appetite from investors for buying more private student debt. “If we had $4 billion (of yearly originations), we’d easily sell it,” he says.
Ironically, Sallie Mae also faces competition from Navient, which it spun off in 2014 as a loan-servicing company. Last year, without admitting or denying the allegations, Navient settled CFPB charges that it had misled federal student loan borrowers–it paid $120 million and agreed to a permanent bar from servicing federal student loans. But Navient isn’t barred from making and servicing its own private loans and through its $155 million acquisition of fintech lender Earnest in 2017, has become a player in that market, originating $366 million of in-school loans in 2024, with about half of that to grad students.
Yet another potentially big player: SoFi, which was founded in 2011 to refinance the graduate school debt of the most successful Millennials. Now publicly traded and with $2.6 billion in 2024 revenue and a broad product lineup, SoFi reported $1 billion of volume in the second quarter for its student loan business, which includes refinancing and in-school originations.
Now, all those players will be angling to lend to the most prized graduate borrowers. Sallie Mae boasts its borrowers have an average FICO score of 754 at approval. (The average FICO score in the U.S. is 715.)
Ascent CEO Ken Ruggiero wants to fill the gaps left by traditional student lenders, and hopes to bring the firm’s risk-sharing model to grad schools.
Ascent
That’s where Ascent comes in. Ruggiero, himself a first-generation college student (his parents owned a New Jersey ice cream shop), wants to fill in the gaps–the part of the market that isn’t, as he once put it, “dependent upon generational wealth.” Ascent lent $282 million in 2024, and 31% of its borrowers don’t have a cosigner. In addition to its traditional financing, the startup offers what it calls Outcomes-Based Loans, through which college juniors and seniors can borrow based on their earnings potential rather than just credit score. Ascent borrowers have an average FICO of 678 and the firm even has a deal to get referrals of borrowers SoFi turns down.
Ascent also provides financing for career training programs, like coding, phlebotomy and HVAC repair, with the schools sharing in the risk of default. Now, Ruggiero is looking to bring that model to grad schools—hence his webinar for the law schools. In August, Ascent closed a $32.45 million Series B led by Stand Together Ventures Lab, and Ruggiero is in the market for a Series C to fuel such an expansion. “What we’re really focused on now is working with the schools and saying, how much risk do you want to take in your student outcomes?” Ruggiero says. “Because if we can’t fund them with—I’ll call it Wall Street money—then you’re going to have to.”
Significantly, DePaulo says College Ave is also now in discussions with schools about risk-sharing models.
Yet another start-up eyeing the graduate school funding gap is Funding U, which counts Forbes 400 member MacKenzie Scott among its investors. CEO Jeannie Tarkenton founded the fintech a decade ago to lend to undergraduates who were falling through the cracks. It has lent around $100 million to undergraduates without a cosigner and uses artificial intelligence to analyze factors like a student’s transcript and financial aid offer to determine if they’re likely to earn enough to pay back the loans. In the wake of the federal changes, Tarkenton is exploring extending that model to law students, who, she notes, have a shorter time until they start earning than do, say, medical students.
“I want to live in a world where there is more opportunity for people who want to work hard and have the ability but just were born with less money in their parents’ pockets,” she says.
More from Forbes
Read the full article here