Colleges and universities expect the Trump administration’s new limits on government-backed student loans will drive more families to higher-cost private lenders. John Witter, CEO of industry leader Sallie Mae, expects his company will attract around $5 billion in new private loans, thanks to lifetime limits on taxpayer-backed student borrowing in President Donald Trump’s Big Beautiful Bill.
Investors, meanwhile, are betting that private college loans will balloon under the Trump rules. But less than half of families who apply qualify for mainstream lenders’ private student loans.
So a group of executives who used to work at Sallie Mae, which is based in Wilmington, have organized a start-up company, GradBridge, to make loans at higher interest rates to students who max out on scholarships and government loans but still hope to finish college or graduate school.
On Wednesday, GradBridge said it had raised $20 million to speed its growth before the new loan limits begin next summer.
The money was raised from private investors led by Acorn Investment Partners, which is managed by Los Angeles-based Oaktree Capital Management. Oaktree’s investors include the Pennsylvania public schoolteachers’ (PSERS) and state workers’ (SERS) pension funds.
GradBridge will be a “second-look” lender for families turned down by mainstream private college lenders, said Jen O’Donald, GradBridge founder and CEO.
O’Donald, who lives in Chester County, is a former head of products for Sallie Mae and the mother of two college students. Her top lieutenants include chief financial officer Brian Carp and chief operations officer Lisa Kaplan, also Sallie Mae veterans. Advisers include Sallie Mae Bank’s former president, Paul Thome, and former chief credit officer Dan Hill.
After Trump’s election last year, O’Donald said, she and former colleagues reviewed the “massive disruption” the Trump platform promised in college financing and looked for business opportunities.
Even if only some of the changes were enacted, “only about 35% to 45% of private college loans get approved,” and many students’ families are not able to get a private student loan after they have exhausted federal grant and loan programs, she said in an interview.
With the lifetime limits on student loans enacted by the Trump administration, O’Donald sees an “overwhelming shift” away from government programs to private loans over the next few years, as students grandfathered under earlier programs graduate and new students borrow up to the new program limits.
GradBridge expects to get referrals from colleges and mainstream lenders of borrowers who don’t fit the high-end ability-to-pay profile.
While mainstream lenders could charge an annual interest rate from the mid-single digits to as much as 18% a year, GradBridge might charge less-bankworthy borrowers an additional 3% or 4% on top of the mainstream rate, driving monthly payment up by $30 or $40 for every $10,000 owed.
O’Donald said GradBridge offers an alternative to “credit cards, personal loans, parents’ 401(k) accounts, home equity loans” and other costly alternatives families use to help their children stay in college.
Federal student loans are made to applicants who apply to government-approved, mostly four-year colleges, without the kind of traditional loan underwriting used to evaluate if borrowers are likely to repay home, auto, or small-business loans.
Not surprisingly, those student loans suffer a high loss rate, the justification lenders used to get the government to agree to prevent federal student loan debtors from having their loans discharged in bankruptcy.
But private lenders like Sallie Mae and GradBridge consider family income and other factors that affect whether the loan will likely be paid, O’Donald said.
Most private college loans require adult cosigners. Because they rely mostly on family income to ensure they get paid back, lenders typically don’t worry about what majors or graduate degrees a borrower pursues, she added.
“GradBridge’s approach addresses a real market gap” for students who “fall just outside of traditional credit underwriting models,” Yadin Rozov, Acorn’s chief investment officer, said in a statement.
GradBridge employs around half a dozen people. It plans to increase to around 30 by 2027.
O’Donald said the Wilmington area is a national center for student lending and a good place to hire for a loan start-up.
Besides Sallie Mae, it is home to College Avenue, another student lender founded by Sallie Mae veterans; Navient, a student-loan servicing company; and other consumer payment companies.
With college enrollments flat or declining, O’Donald said schools are eager to forge ties with private lenders.
“The first big impact will be next summer,“ she said. ”It will take a few years before the full impact will be seen, but schools are starting to be concerned about how they will keep kids enrolled.”
