The $14 Billion Graduate Lending Opportunity Hiding in Plain Sight

Mack Wallace is VP of Product at MPOWER Financing, where he leads a nearly $1B student loan portfolio serving high-potential graduate students overlooked by traditional lenders through AI-powered underwriting. A former CFPB regulatory strategist and Aspen Institute Fellow, he builds next-generation education finance products and publishes extensively on fintech innovation.

As graduate students head back to university this fall, the familiar rhythms of campus life mask a deeper shift. This is the last 'normal' back-to-school season before the most significant restructuring of graduate student finance in decades.

The elimination of the $14 billion-per-year Grad PLUS program will fundamentally reshape who can access graduate education — and create the largest new lending market opportunity in higher education finance.¹

The Government's "Retreat" from Education Financing

The federal government lends $87 billion annually to students, with roughly half flowing to graduate programs.² For almost two decades, this massive lending operation allowed graduate students to borrow up to 100% of the cost of their degree through the Grad PLUS program — essentially unlimited taxpayer-backed borrowing.

This summer’s ”Big Beautiful Bill Act” fundamentally restructures the federal student loan system. Starting July 1, 2026, unlimited graduate borrowing disappears. The new caps are stark: graduate students will be limited to $20.5K annually — and $100K lifetime — in borrowing, while professional degree seekers face $50K yearly/$200K lifetime caps. Parent PLUS borrowers are restricted to $20K annually, with $65K lifetime limits.³

More than 440,000 graduate students across nearly 1,800 schools took out Grad Plus loans last academic year, representing about one-third of all federal graduate loans disbursed. These students borrowed an average of $32,000 annually, with a quarter of STEM graduates relying on these now-eliminated loans.⁴

The math is simple: the new rules leave a $14 billion annual funding gap for these students–and future ones like them. Notably, this exceeds the total previous annual originations of all private student loan lenders. Combined.

Danger and Opportunity

This structural transformation creates the largest change in higher education finance since the federal government entered direct lending in 2010. For lenders accustomed to competing in mature markets with thin margins, a $14 billion annual opportunity represents something increasingly rare: genuine white space in a regulated, stable sector with predictable cash flows. But, for students and their families it creates the risk of a troubling socioeconomic divide in education.

That is because the lending caps create predictable market segmentation that fundamentally divides along a single line: cosigner versus no-cosigner borrowing. The mechanics are straightforward: federal caps of $20.5K annually mean a typical $60K Master's program creates a $40K annual funding gap. Students from higher-income families typically have established credit relationships or qualified cosigners. Conversely, students without cosigners — often first-generation college graduates or those from working-class backgrounds — face the risk of exclusion from traditional private lending markets.

Currently, approximately 68% of existing private graduate loans require cosigners, establishing a baseline for understanding how this market will evolve.⁶ This divide becomes critical because traditional private lenders have historically preferred cosigned loans for risk management, yet the new federal caps will drive significant demand from students who cannot secure cosigners. The troubling implication: this segmentation correlates with socioeconomic status rather than academic merit, creating both a supply-demand imbalance and a societal problem where educational access depends on family financial capacity.

The risk of creating a two-tier system where graduate education access depends more on family wealth than individual potential is clear. For lenders, however, this presents a market opportunity: serving high-potential but overlooked students with genuine financing needs and limited options.

Technology Transforms the Competitive Landscape

This market opportunity is occurring at the same time as a revolution in technological capability, the convergence of which will create the most significant reshuffling of the competitive dynamics in graduate student lending in decades. The $14 billion annual funding gap breaks down roughly into $9 billion in cosigner-accessible lending (assuming the current 68% share) and $5 billion in no-cosigner demand — each segment attracting different types of lenders for different strategic reasons.

Banks are likely to find the cosigner segment most attractive: lowest risk, easiest to underwrite using traditional methods, and an opportunity to retain current banking customers while establishing relationships with their children. With the lowest cost of capital, banks can offer the most competitive rates in this segment.

Fintechs face a different opportunity in the no-cosigner market, where innovation becomes essential. Lenders now have access to sophisticated risk assessment tools beyond traditional credit metrics. For example, the Department of Education's College Scorecard provides program-level graduation rates, employment statistics, and salary data — precisely the forward-looking information needed for outcome-based underwriting. If these modern underwriting tools can be deployed at scale, they can help close the $5 billion gap in no-cosigner demand.

Take this scenario: a Gen Z student with limited credit history beyond some BNPL usage seeks $40K in private financing for a business analytics master's program with demonstrated $100K post-graduation salaries. Traditional underwriting would likely reject this applicant. Outcome-based underwriting using alternative data—income trajectory modeling, graduation completion algorithms, and AI-powered document processing for real-time verification — can approve financing based on future earning potential rather than credit history.

Leading lenders are already moving. MPOWER focuses exclusively on no-cosigner lending using future potential assessments, while companies like Ascent offer outcome-based loan products. I predict we'll see broader adoption of AI/ML applications in student lending throughout 2025, including a return to school quality measures in underwriting decisions — something not seen since Upstart’s “no action” letter from the CFPB over a decade ago opened alternative underwriting in student lending.

Universities as Market Participants

Universities shouldn’t sit on the sidelines watching this happen. They are about to lose a major source of federal support, and unless they want to see their enrollment plummet — or their student body skew decidedly upper-income — they may need to become active market participants and explore various partnership models. Such partnerships have precedent: in the 2000s, universities collaborated with lenders like Citibank (CitiAssist programs at Penn and NYU) and Sallie Mae (affinity programs) to offer co-branded financing. However, these partnership arrangements faced regulatory scrutiny for steering practices and other issues that could run afoul of UDAAP regulations, so universities will need to proceed more carefully this time.

We may see risk-sharing arrangements where universities and lenders collaborate on loan programs with shared credit losses — perhaps universities taking first-loss positions or capping lender losses for high-ROI programs. Some institutions may follow the auto industry playbook, establishing financing arms funded through endowment resources or raised capital to manage student loan portfolios directly. Universities could band together to pool risk, creating reinsurance-like models that spread exposure across multiple institutions while maintaining program-specific underwriting standards.

Time to Act

The timeline is shorter than most financial services executives realize. Universities will begin their 2026 financial aid packages in January 2026, and early-moving lenders are quietly positioning themselves for July 2026. That means every stakeholder should be working on their P0 now:

• For banks and lenders: evaluate graduate lending market entry focusing on the $9 billion cosigner segment where traditional underwriting advantages apply, while exploring technology partnerships for no-cosigner access.

• For fintechs: the $5 billion no-cosigner opportunity requires innovation in alternative data usage, AI/ML underwriting, and outcome-based lending approaches. The CFPB's existing guidance on AI/ML in lending provides a regulatory framework, with particular attention needed for transparency, accuracy, and fairness in outcome-based approaches.

• For private credit funds: develop investment theses for education finance given its unique portfolio characteristics, including longer duration than typical consumer credit, income growth correlation, and demographic diversification benefits. Start due diligence on fintech lenders and platforms positioned to capture the $14 billion opportunity.

• For policymakers: monitor financial access measures and enrollment patterns closely to ensure the transition doesn’t create educational deserts. Enrich the College Scorecard and related government data sets to include more program-level employment and salary data to enable responsible fintech underwriting. Most critically, prepare to supervise a larger private student lending market — spotting risks and preventing bad practices while encouraging innovation.

Competitive advantages belong to institutions that recognize this convergence of substantial unmet demand, improved data infrastructure, and technological capabilities. Modern underwriting tools enable profitable service to previously challenging market segments, transforming risk assessment from backward-looking credit history to forward-looking earning potential.

The question isn't whether this market gap will be filled — it's whether established financial institutions will lead the solution or watch fintech upstarts capture the opportunity. As someone who helped shape regulatory policy at the CFPB and now works daily with innovative student lenders, I understand both sides of this transformation: the policy changes creating new market demand and the technology and data enabling new supply. The institutions that combine regulatory understanding with technological capability will define this market's future. The opportunity won't wait for consensus — it requires leadership now.

The opinions shared in this article are the author’s own and do not reflect the views of any organization they are affiliated with.

^[1] K. Sophie Will, “GOP Tax Bill Would Eliminate Grad School Loans for Half Million,” Bloomberg Law, July, 2 2025, https://news.bloomberglaw.com/social-justice/grad-students-face-loss-of-major-loan-under-big-beautiful-bill.

^[2] “Student Loan Debt Statistics 2025,” Education Data Initiative, accessed August 4, 2025, https://educationdata.org/student-loan-debt-statistics.

^[3] H.R.1 - One Big Beautiful Bill Act, 119th Congress (2025-2026), https://www.congress.gov/bill/119th-congress/house-bill/1/text.

^[4]  Will, "GOP Tax Bill."

^[5] "Trump Student Loan Changes Could Hit Hundreds of Thousands," Wall Street Journal, July 13, 2025, https://www.wsj.com/personal-finance/trump-student-loans-tax-spending-bill-9dfc96eb. And; “Enterval Private Student Loan Semi Annual Reporting Ending Q3 2024,” Enterval Analytics, January 28, 2025. https://www.enterval.com/media/files/enterval/psl/psl-report-enterval-private-student-loan-semi-annual-report-q3-2024.pdf.

^[6]  Education Data Initiative, "Student Loan Debt Statistics."

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