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Tuesday, April 15, 2008

Student loan industry imploding?

Here is a list of headlines coming from the student loan industry these days. This is just over the last six weeks or so but serves to provide a flavor for the turmoil students and especially lenders are going through.

Click on the story titles for the details.

Big US student loan guarantor files for bankruptcy

Student Loan Stir Hits First Marblehead

TERI, a guarantor that worked closely with First Marblehead, filed for bankruptcy. It has more than $1 billion of assets, and between $500,000,001 and $1 billion of liabilities. Ouch...

Sallie suspends combined federal loans

Sallie has decided to stop doing loan consolidations, even for federal loans, saying the business has become unprofitable. The credit crunch comes to former students now in repay...

Lenders Drop Out of Student Loan Market

Forty-six student lenders have stopped making federally guaranteed student loans, either temporarily or permanently. Recently enacted legislation that reduces profits, difficulties in doing securitizations and even auction-rate securities are having an impact.

Bill Introduced to Limit Effect of Potential Student Loan Credit Crunch

Spellings plans to avert student loan trouble

Congress Introduces Student-Loan Aid For Lenders

The government is trying to come to the rescue of both students and lenders. Some say they caused the problem in the first place with the College Cost Reduction and Access Act (CCRA) legislation.

CIT Ends Student-Loan Originations

CIT has enough trouble in other segments so they will stop making new student loans, both the private and federal varieties.

NorthStar Education to suspend FFEL lending

NorthStar blames the state of the financial markets...

Leading loan lender suspends funding program for next year

New Hampshire Higher Education Loan Corporation throws in the towel...

MOHELA delays payment toward Lewis and Clark Discovery Initiative

Amid the first losses in its history, Missouri's student loan authority is delaying part of a payment toward the state's college construction projects. Not only student loans at risk but buildings, too...

First Marblehead Statement on Recent Actions by Moody's

Ratings agency puts certain notes on review, erodes confidence in securitized portfolio...

Zions dropping out of fed student loan program

Pointing to CCRA legislation, Zions Bank also throws in the towel...

Student loan lender closes, loan origination operation based in Buffalo, NY, shuts down...

M&T, two others end federal student loans

M&T, HSBC and TCF Financial drop out of federal student loan program...

Auctions of student loan bonds fail again

Auction-rate bonds, backed by student loans, fail to sell. Montana Higher Education Student Assistance Corp. says no impact to student loan financing yet...

Conclusion --

The CCRA and the credit crunch have combined to create a one-two punch felt by students and lenders alike.

Lenders are finding it harder to obtain financing to support their loan origination programs. The CCRA Act has slashed their profit margins to the point where many lenders are abandoning the Family Federal Education Loan Program (FFELP). For federal loans, the financing problems are driving up the cost of capital while the government caps the rates lenders may charge, squeezing lender margins. Whereas lenders could previously rely on securitizations to fund loan originations, the securitization market for student loans is now drying up.

Students are finding that lenders are no longer waving fees or providing benefits for on-time payments. Private student loans now require higher credit scores in order to qualify. Consolidation loans are now more difficult to obtain, especially if the total loan balance does not reach a certain threshold.

In an environment like this, the lenders with access to the cheapest funding will remain in business and will likely expand market share as other players abandon the field. The lenders that come to mind are the ones who are part of a large financial institution that extends financing at advantageous rates. Citigroup's Student Loan Corp. (STU) comes to mind as one example.

Luckily for students, the student loan industry is huge and loans are generally still available. And, as usual, the government is lender of last resort with their direct lending program.


College Search Edvisors said...

Additionally, the Dept. of Education's Direct Lending Program, a competitor to major private banks in funding government student loans, is going to see 100% - 200% growth in application volume over the next 6 months as many schools move into the Direct Loan Program. Is the government going to be able to ramp up that quickly and process that many new loans?

This is all happening as the Direct Lending Program is seeing a 300% - 400% growth in their consolidation business - the least profitable piece of the student loan business. Try calling their help line and see if you don't get a busy signal...

In the meantime, schools are going to have to process significantly more new applications this year. Most students apply for federal loans through a master promissory note which covers all 4 years. If the lender you applied with last year went out of business, you have to complete a new MPN with a new lender this year. This will require additional work for financial aid officers who already have seen cutbacks in funding.

Anonymous said...

Bookmarked this. Thanksgiving owing to you looking for sharing. Unequivocally worth my time.

Option Tips said...

Nice handy list, though I know some of them but many are new.
Good to be kept and bookmarked. I passed that on to friends.

thnx a lots 4 sharing...

Option Tips

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