This is a question that I am often asked at conferences by concerned financial aid administrators who have seen the significant drop in private (non-federal) student loans and wonder if there is another shoe to drop should lenders such as Sallie Mae and Citibank no longer make federal student loans.
Discover Financial reiterated their commitment to their private loan product in their 10-K today:
"We currently offer both federal and private student loans. In September 2009, the U.S. House of Representatives passed the Student Aid and Fiscal Responsibility Act (“SAFRA”), which is currently under consideration in the U.S. Senate. If passed in its current form, SAFRA would require all federal student loans to be made directly by the federal government starting July 2010, rather than by private institutions through the Federal Family Education Loan Program. Because SAFRA allows financial institutions to continue offering private student loans, we do not expect SAFRA to have an impact on our ability to continue offering private student loans, even if we discontinue offering student loans under federal programs."
A few thoughts:
- Given the consolidation that has already occurred in the private loan market, the survivors today are those institutions that have found a reliable source of financing to continue to make these loans. Looking at the list of top private student lenders compiled by SLA, seven of the ten listed are either regional or national banks with a large deposit base. For these institutions, their private student loan exposure pales in comparison to their balance sheets, which in some instances are greater than $2 trillion (you might remember that "too big to fail" concerns have not gone away). I guess that this is a long winded way to say, that I wouldn't anticipate the larger players in the market to leave, regardless of what happens to FFEL.
- Private loan business is a much more profitable business for lenders than FFELP. For example, Sallie Mae earned a 6.83% rate on their $23.2 billion private loan portfolio in 2009 vs. a rate of 2.07% to 2.69% on their FFELP assets. When you can lend out at 9.5% to 10.0% and take in deposits at 1%, there seems sufficient justification to keep on lending, even if defaults remain at elevated levels.
- I suspect if FFELP goes away, you will see the following changes to their sales and marketing programs:
- The lender's direct sales channel to serve financial aid offices will be de-emphasized. If SLA survey results play out and only 10-15% of schools develop preferred lender lists for private loans, I suspect lenders will further rationalize their sales channel, which have already undergone several rounds of layoffs already. The one exception here will be Sallie Mae, who benefits from having the DL servicing contract, which will allow them to maintain a school presence.
- Direct to consumer marketing will increase as lenders seek to go directly to consumers since school financial aid offices will be providing less guidance and information to students. For example, I have seen a change in the top Google Adwords users recently, with more of the top lenders (Sallie Mae, Wells Fargo, PNC, Discover) paying for placement on "student loans" search page.
Also, on the horizon are two legislative proposals which would have a much larger influence on the private student loan market than the elimination of FFEL:
- $5 billion expansion of Perkins Loan program proposed in SAFRA would have significant impact on reducing demand for private student loans. Recall that the increase in Stafford loan limits in July 2008 had what one lender described as almost a "dollar for dollar impact" on private student loans.
- Debt swap plan which would allow borrowers with unused federal loan capacity to swap their private loan debt for federal loans. This would reduce the outstanding private loan portfolios and by only allowing current borrowers to swap out their debt, it would leave the lenders with a higher proportion of delinquent borrowers.
With February 14th approaching, the date that the Federal Reserve private loan regulations kick in, the Department is still working on finalizing the self-certification form (comments were due last Friday). Since this form is a requirement before a lender can disburse funds for a private loan, it does raise the question of what happens if it is not available by the 14th. As it is, schools will need to scramble to incorporate this form into their process flow. The only good news is that this tends to be a relatively quiet time on the student loan front.
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Thanks to Justin Draeger of NASFAA for making the following point about the Perkins loan program:
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