Sallie Mae Targets $5 Billion a Year as Washington Exits Graduate Lending
The Ninth Circuit locked in $23 billion of borrower-defense relief the same month Grad PLUS ended. A roughly $15 billion a year federal market now belongs to private and state lenders, on private terms.
The ruling. On July 17, a unanimous three-judge panel of the Ninth Circuit rejected the Education Department's bid to delay relief deadlines in Sweet v. McMahon, locking in what the Project on Predatory Student Lending calls the largest settlement ever reached against the federal government: at least $23 billion in loan cancellation for more than 450,000 borrowers who said their schools, including ITT Technical Institute, Corinthian Colleges, the University of Phoenix and the Art Institutes, misled them.1 2 More than 170,000 post-class applicants whose applications sat undecided past the settlement deadlines now receive automatic full relief.3
The statute. Sixteen days earlier, on July 1, the Grad PLUS program ended for new borrowers and hard caps took effect on federal graduate debt: $20,500 a year and $100,000 lifetime for most graduate programs, $50,000 a year and $200,000 lifetime for the eleven statutory professional fields such as law and medicine. Existing Grad PLUS borrowers keep access only until July 1, 2029 or the end of their current program.4 7
The capture. Sallie Mae CEO Jonathan Witter told investors that federal PLUS reform "created the potential for a $4.5 billion-$5 billion increase in annual originations for Sallie Mae over the next several years." The company guided to 12 to 14 percent private education loan origination growth for 2026 on $716 million of second-quarter originations.10 9 State loan agencies are expanding programs as the caps bind, and a Senate bill would exempt them from the conflict-of-interest rules written after the 2007 preferred-lender scandal.11 12
Why this is the operator story. This is the largest forced handoff of a federal consumer credit market to private balance sheets since the FFEL wind-down in 2010, and it is happening in the same month the courts finished pricing what went wrong the last time underwriting discipline and school quality were someone else's problem. The volume is real, the capture guidance is already on the tape, and the protections that generated $23 billion of federal cancellation do not travel with the borrowers.
What Alternative Business Lenders Need to Know
What did the Ninth Circuit lock in on July 17?
The end of the government's ability to slow-walk the largest class settlement it has ever signed. Sweet was filed in 2019 in the Northern District of California over the Education Department's failure to decide borrower-defense applications, the Higher Education Act mechanism that lets borrowers seek cancellation when a school misled them about job prospects, transferability or earnings. The settlement, approved in 2022, covered roughly 200,000 class members whose applications tied to a list of mostly for-profit schools, and gave a second group of more than 170,000 post-class applicants a decision deadline with a hard consequence: no decision by the deadline, automatic full relief.3 The Department missed deadlines, appealed for more time, and on July 17 a unanimous panel said no. That converts the contingency into a fixed number: at least $23 billion of federal loans wiped, discharges and refunds now processing on a court-supervised clock.1 2 Lead plaintiff Theresa Sweet, whose case outlasted three administrations and three named secretaries, called the class "a community united by the belief that what happened to us was wrong."1 More than 210,000 borrower-defense applications filed after the settlement window remain pending behind them.3
What changed for graduate borrowers on July 1?
The federal government stopped writing uncapped graduate credit. Grad PLUS, which since 2006 let any credit-eligible graduate student borrow up to the full cost of attendance, ended for new borrowers on July 1. In its place: Direct Unsubsidized caps of $20,500 a year and $100,000 lifetime for most graduate programs, and $50,000 a year with a $200,000 lifetime ceiling for the eleven fields the statute defines as professional degrees, law and medicine among them. Parent PLUS was capped as well, and existing Grad PLUS borrowers were grandfathered only through July 1, 2029 or the end of their current program, whichever comes first.4 7 8 The binding constraint is not subtle: attendance costs for medical and dental programs routinely clear the $200,000 lifetime cap on their own, which forces the gap onto private or state balance sheets starting with the 2026-27 award year.8
How big is the market Washington just vacated?
Roughly $15 billion a year in Grad PLUS originations, by the Gap Funding Group's count of the program Congress shut off.5 That is the vendor's calculation; the underlying record is public and rerunnable. The Education Department publishes quarterly Title IV program volume reports, loan-level by school and program type, at the Federal Student Aid Data Center, and any credit committee can pull the Grad PLUS series and check the run-rate itself.6 For scale on the stock rather than the flow: federal student balances stood at $1.66 trillion in the first quarter of 2026 and were the only major consumer category shrinking, down $6 billion in the quarter, per the New York Fed's Household Debt and Credit report and its Consumer Credit Panel data file.14 15 The Sweet discharges will push that stock down further while the origination flow reroutes to private hands. Both curves now bend away from the federal balance sheet at once, which has not happened since the FFEL program closed to new loans in 2010.
Who is moving to take the volume?
The named-entity answer is Sallie Mae, and it put a number on itself. CEO Jonathan Witter told the second-quarter call the company spent the past year preparing for this market, with product updates across its medical, dental, law and MBA lines and a new parent loan, and repeated that PLUS reform "created the potential for a $4.5 billion-$5 billion increase in annual originations for Sallie Mae over the next several years." Q2 originations were $716 million, up 4.5 percent, in a business where volume concentrates in the third quarter around fall enrollment, and full-year guidance calls for 12 to 14 percent private education loan origination growth.10 9 State the limit of that evidence honestly: a CEO's addressable-market figure is a target, not a booking, and the quarter it accompanied missed on earnings as margins compressed.10 The second lane is state loan agencies, which CNBC reports are expanding programs and marketing hard as the caps bind, often at rates below the private banks but with state-specific eligibility.11 And Congress is greasing that lane: S. 4097, introduced by Senators Murkowski, Reed, Cassidy and Shaheen, would carve state-run and state-chartered nonprofit programs out of the Higher Education Act's preferred-lender rules, the disclosure and code-of-conduct regime Congress built after the 2007 revenue-sharing scandal between lenders and financial aid offices.12 13 More borrowers fall under that carve-out every semester the caps stay in place.
Where does the risk actually transfer?
To the borrower first, and then to whoever funds the paper. The protections that produced this month's $23 billion are features of federal loans: borrower defense to repayment, income-driven repayment, death and disability discharge, and a political constituency that litigates. Private student loans carry none of the first three by statute, are notoriously hard to discharge in bankruptcy, and price on credit data, cosigner strength and program outcomes rather than on a uniform federal rate.4 8 That cuts both ways and the honest version says so. Private underwriting will decline the marginal program that Grad PLUS funded blindly, which is a feature if you believe uncapped federal credit inflated tuition at exactly the schools that generated the borrower-defense docket. But when the next cohort of school-quality failures surfaces, there will be no Sweet mechanism; origination-quality disputes become lender liability and reputational risk, not taxpayer liability. The lenders inheriting this market are inheriting the underwriting problem the government just paid $23 billion for getting wrong.
What should credit teams financing consumer originators do this quarter?
Three concrete things. First, treat private student lending as a live growth vertical, not a legacy asset class: a mandated demand shift of this size into a deployment-starved private credit market will pull in warehouse lines, forward-flow agreements and ABS issuance, and the first facilities will set the covenant template. The capital is available; the deployment-starved fundraising glut in the Comvest item below is hunting exactly this kind of structured consumer asset with structural volume growth. Second, price the protection gap rather than mapping federal loss curves onto private paper: federal performance history reflects IDR and discharge backstops that private notes do not carry, so seasoned private cosigned pools are the right comparable, not the federal book. Third, if your borrowers or partners originate where state agencies operate, watch S. 4097: if the conflict-rule carve-out passes, school financial aid offices can steer to state programs in ways the 2007 rules currently prohibit, and the competitive map for private originators changes school by school.13 And for SMB and equipment originators, the shift matters from the other side of the table: the warehouse lines, forward-flow buyers and ABS windows that absorb private student volume are the same funding capacity your own facilities compete for.
Our Opinion
Hold both halves of this story at once. The same month the courts finished forcing the government to pay for two decades of lending into programs it never underwrote, Congress handed the next two decades of that market to lenders who will underwrite it. That is not hypocrisy; it is the system finally pricing school risk somewhere. But the location of the pricing matters. Grad PLUS socialized bad program quality and the taxpayer ate it as the Sweet settlement. Private capital will not eat it; it will decline it, price it, or securitize it, and each of those choices lands on a real borrower at a real school in a way a federal promissory note never did.
For the funds and facilities that read this newsletter, the operator question is capacity discipline. A $15 billion annual flow does not migrate in one award year, and the temptation will be to buy growth with credit box expansion, the same move that built the private student loan books of 2005 to 2008. The winners here will be the lenders who treat program-level outcome data the way an MCA underwriter treats daily card volume: as the actual collateral. The losers will be whoever finances tuition at the schools the federal government just spent $23 billion apologizing for.
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Headlines You Don’t Want to Miss
Manulife | Comvest Credit Partners announced August 3 the final close of Comvest Credit Partners VII at $5.4 billion, the largest fundraise in the platform's history, targeting North American middle-market cash-flow and asset-based lending across sponsored and non-sponsored companies. The firm describes the mandate as "differentiated lending rather than the broadly syndicated segments of the market"; the platform, led by global head Robert O'Sullivan, now runs roughly $21.5 billion after Manulife took a 75 percent stake in August 2025, and the firm says the fund is already substantially deployed.16 The context is the divergence we have tracked for three editions: PitchBook put second-quarter US direct-lending volume at $33.6 billion, down roughly 55 percent quarter over quarter and the lowest since 2023, even as closed-end fundraising hit a two-year high.17 A record vintage with an explicit asset-based, non-sponsored mandate is dry powder pointed at the segment closest to factoring and asset-based alternative lending. Expect sharper competition on larger facilities, and defend on speed and data rather than price.
VantageScore announced July 30 that 4.0 is now integrated into Optimal Blue, the mortgage market's dominant product, pricing and eligibility engine, extending the challenger score into pricing, MSR valuation, hedging and trading workflows, plus prequalification, eligible government-backed loans and Federal Home Loan Bank collateral pledging.18 19 The price war underneath keeps escalating: Equifax has locked VantageScore 4.0 pulls at $1 through 2027, with 2.2 million second-quarter pulls and roughly 1,200 lenders dual-pulling, and TransUnion cut the score to 99 cents while FICO holds classic scores at $10 for 2026.20 21 This is the third scoring-war beat we have covered in a month, after the Figure FICO 9 securitization and the Equifax price lock, and the pattern is consistent: the fight is moving into origination infrastructure, where defaults get set. Consumer lenders should dual-pull while pulls are near-free and build their own score-migration data before the market chooses a winner for them.
The FDIC announced July 31 a consent order against Franklin, Tennessee-based Lineage Bank, dated June 24, the bank's second since February 2024. Without admitting or denying charges of unsafe or unsound banking practices, Lineage agreed to submit a three-year business plan, a profit plan, a problem-credit reduction plan, a capital plan and a brokered-deposit reduction plan, and to obtain regional director approval before paying dividends or management fees.22 23 Lineage was one of four partner banks where Synapse, the banking-as-a-service middleware that collapsed in 2024, opened deposit accounts for roughly 100 fintech platforms; the 2024 order targeted that program, while this one reaches core earnings, credit quality and funding.24 Recap Financial Ventures took a majority stake in the holding company in March.23 For fintech lenders, the read is fragility at the sponsor-bank layer: the Synapse hangover now outlasts the BaaS cleanup itself, and it keeps making the direct-charter path we covered with Increase, Klarna, Enova and OppFi look less optional.
Sources
1 Project on Predatory Student Lending | Landmark Borrower Defense Case Sweet v. McMahon Becomes Largest-Ever Settlement Against the U.S. Government
2 CNBC | Sweet v. McMahon to clear 450,000 student loan borrowers' debt, July 31, 2026
3 Project on Predatory Student Lending | Sweet v. McMahon case page (settlement terms, class definitions, deadlines)
4 NASFAA | Big Changes to Federal Student Loans: What Graduate Students Need to Know (loan caps effective July 1, 2026)
5 The Gap Funding Group | The 2026 Graduate Education Funding Crisis (Grad PLUS annual origination volume)
6 Federal Student Aid Data Center | Title IV Program Volume Reports (official quarterly loan origination data, public and rerunnable)
7 UC Law San Francisco | Important Federal Student Loan Changes Effective July 1, 2026
8 Saving for College | Grad PLUS Loans Ending in 2026: New Borrowing Rules and Limits
9 SLM Corporation | Second Quarter 2026 Earnings Release and Supplement
10 Investing.com | Sallie Mae Q2 2026: originations grow amid margin pressure (Witter $4.5-5 billion remarks)
11 CNBC | States expand student loan options as new federal borrowing caps take effect, August 2, 2026
12 NASFAA | Legislation Introduced to Exclude State-Based Loan Programs from Preferred Lender Requirements (S. 4097)
13 Congress.gov | S. 4097, State-Based Education Loan Awareness Act, 119th Congress
14 Federal Reserve Bank of New York | Quarterly Report on Household Debt and Credit, 2026Q1
15 Federal Reserve Bank of New York | Household Debt and Credit 2026Q1 data file, Consumer Credit Panel/Equifax
16 Alternative Credit Investor | Manulife | Comvest Credit Partners raises $5.4bn for largest direct lending fund
17 PitchBook | US direct lending activity nears three-year low, PC Monitor
18 Business Wire | VantageScore 4.0 Now Integrated into Optimal Blue, July 30, 2026
19 HousingWire | Optimal Blue integrates VantageScore 4.0 into pricing, hedging and trading workflows
20 HousingWire | Equifax locks $1 VantageScore 4.0 pricing through 2027
21 HousingWire | TransUnion cuts VantageScore 4.0 price to 99 cents for lenders
22 FDIC | Enforcement Decisions and Orders, press release orders, July 31, 2026 (Lineage Bank consent order)
23 PYMNTS | Former Synapse Partner Lineage Bank Agrees to FDIC Consent Order
24 Banking Dive | Tennessee bank hit with FDIC consent order over BaaS business (February 2024 order)
