Smart Money peers into the crystal ball and forecasts five changes should FFEL be eliminated:
- Fewer lenders: "That shouldn’t affect students’ federally-subsidized loans, but they
may have fewer choices when it comes to private student loans"
- SLA comment: With the private loan market already having consolidated in the last year, with 8-10 lenders making up 90%+ of the market, and given the profitability of the business (LIBOR + 9 to 10% is an attractive yield with 90% cosigned loans), I don't suspect that many of the incumbents would leave. If they do leave it will be not because of the FFELP volume lost as much as it is because of the volume lost from Perkins expansion (see below) and the loss of interest income from the debt swap proposal floating in the Senate (anyone hear about this recently?).
- Repayment hassles: "Those who already have federally-subsidized student loans through a
private lender, but borrow directly from the government for their
remaining college years, will have to write at least two different
checks a month when they start repaying their loans."
- SLA comment: Anyone have any statistics on check writing among young people? I would think that if most young people use on-line banking that setting up automatic payments mitigates this hassle but maybe I'm wrong.
- Private loan traps: "If private lenders can no longer make federally-subsidized loans,
they'll likely focus their marketing dollars on the private-loan
market, potentially signing up customers who could have qualified for
much cheaper federal loans."
- SLA comment: SLA's recent report on lender customer service operations suggests that this happens today already. 14% of our callers were told about private loans before federal loan options. Better yet for lenders, the new Federal Reserve rules on private loans somehow exempt phone calls from their disclosure requirements, so they can approve a student's loan over the phone before they have seen the disclosures.
- More Perkins at higher cost: "Expanding the program may be good news for those students who wouldn’t have qualified under the current, stricter rules. But the new program would drop the government subsidy on interest payments."
- Customer service issues: "But representatives of the student-loan industry, who have been critical of the bill, say that in the long run the lack of choice may have a negative effect on customer service."
The one other notable change will be a dramatic shift in the sales/marketing approach for private loan products. For most lenders, their private loan profits will certainly not support a significant school channel sales and marketing team. Also, new preferred lender regulations seem aimed at discouraging schools from developing preferred lender lists (see my rant here about the downsides associated with this) so the advantage of marketing to schools will diminish. This will move the battleground on-line and will likely also increase direct-to-consumer marketing.