Sallie Mae, the largest private student lender, with an estimated share of over 40% of the private loan market in 2007, according to SLA, delivered the following message to their clients on Wednesday evening:
- Tightening their underwriting on all private loan products
- Adjusting their loan pricing (i.e. raising them). A recent analyst report indicated Sallie Mae was making private loans today at LIBOR + 9.8%. One month LIBOR has been in the 4.5% range recently, so if these rates held up for the next several weeks, the next reset would be over 14%.
For a private loan market reeling from the recent exodus of lenders, this is extremely bad news for students. This combined with rumors of a Citibank cutback in private loans creates a crisis situation in the private loan market, since together Sallie Mae and Citibank represented over 50% of the market in 2007 (and probably a higher percentage in 2008). The key question for both lenders right now is whether they will be making their Dec./Jan. disbursements for those students who received their first loan disbursements this fall. These announcements and events over the past two days are likely to capture the attention of lawmakers and advocacy groups (as well as Treasury Secretary Paulson also).
Remember that according to the bailout bill, that the term "troubled asset" among other things refers to "any other financial instrument that the Secretary, after consultation with the Chairman of the Board of Governors of the Federal Reserve System, determines the purchase of which is necessary to promote financial market stability, but only upon transmittal of such determination, in writing, to the appropriate committees of Congress." However, purchases of these troubled assets are still likely weeks away at best. The Treasury secretary indicated today that he is also considering purchasing equity stakes in banks as a means of stabilizing this crisis.
Here is the text of the letter:
Dear Sallie Mae Customer:
Because of the continuing turmoil and uncertainty in the credit markets, Sallie Mae has made the difficult decision to tighten the underwriting on all our private student loan products (Signature Student Loan(R), MBA LOANS(R), LAWLOANS(R), Sallie Mae DENTALoans(R), Global Health Education Loan), which will require applicants to meet higher credit standards. We believe that this action will mean lower approval rates for these loans.
We will continue to provide all FFELP loans to every eligible student at every eligible school. In fact, there are no changes to the availability and pricing of our Federal Stafford and PLUS Loans.
As a result, we continue to recommend that your students
- Take full advantage of Federal Stafford and PLUS loans before applying for a private credit loan.
- Always apply with a creditworthy cosigner who has excellent credit, when seeking a private student loan.
In addition, the unprecedented credit markets require us to adjust our private loan pricing. Your Sallie Mae Account Executive will contact you directly with pricing change information later this month.
These decisions were not easy to make, but the current financial markets provide no other choice. When conditions improve, we hope to relax our underwriting criteria and serve more students. We will inform you of any changes as they occur.
Until then, thank you for your business with Sallie Mae and we apologize for any disruption that these changes may cause.
Executive Vice President