March 20, 2008

3 Big Banks Leave Government-Backed Student-Loan Program

Washington — Three more large student-loan providers are pulling out of the government-subsidized loan program.

The difference this time is that all three of them are banks.

The Wall Street Journal is reporting that HSBC Bank USA, the M&T Bank Corporation, and the TCF Financial Corporation have all decided to stop offering federally guaranteed student loans following last year’s decision by Congress to cut lender subsidies by more than $20-billion over five years.

All three are among the program’s 50 largest lenders, together providing more than $560-million of the $119-billion in federally backed loans issued in the 2006 federal fiscal year, the Journal reported.

Several other lenders already have announced they are withdrawing from or reducing their participation in the federal loan program, prompting expressions of concern from colleges and some in Congress. Yet Education Secretary Margaret Spellings has given repeated assurances that hundreds of other lenders remain available to provide student-loan money.

The difference this time, however, is that the three lenders withdrawing from the program are all banks. Nonbank lenders had been regarded as especially vulnerable to the combination of the subsidy cuts and the overall crisis in lending attributed to rising rates of mortgage defaults. Banks had been considered less vulnerable because they have their own customer deposits to draw upon as sources of cash.

Initial reaction appears to be falling along the lines already established, with the National Association of Student Financial Aid Administrators calling the banks’ departures a “major concern,” and an Education Department official telling the Journal that the three banks appeared to have been major sources of lending at very few colleges. —Paul Basken

Comments

1. Although they are among the top 50 lenders, these three banks combined provided less than 1/2 of 1% of the loans issued. They believe they can make more money elsewhere. That’s the way business works. There will be plenty of sources for guaranteed student loans through other lenders and the Direct Loan program.

   — Jim    Mar 20, 04:01 PM    #

2. Disagree with Jim. This may be the tip of the iceberg. Many other lenders are taking a close look at FFEL loans and are realizing that Congress went too far in the College Cost Reduction Act. Why make loans that are not uneconomic. If something is not done students might face the Direct Loan program as a monopoly rather than as a choice. Wonder what customer service will look like in two years?

   — Henry    Mar 20, 04:52 PM    #

3. A train wreck is coming

   — hawkeye    Mar 20, 05:39 PM    #

4. Looking at 1/2 of 1% of loans issued is not just case. These lenders are big in targeted areas especially in their home state. I agree with Henry that Congress went too far in the CCRA and they should have done their homework and find out how other markets (i.e. mortgage industry) would have affected FFELP lenders.

   — Will    Mar 20, 05:50 PM    #

5. The article correctly notes that hundreds of FFELP lenders remain in the market. As a financial aid administrator I can attest that there are no shortage of lenders. In fact, many have continued with paying down the origination fee and offering back end benefits. The crowd may shrink a little but that does not mean there won’t be plenty of competition remaining.

   — CB    Mar 20, 06:39 PM    #

6. Forgive my political incorrectness, but private enterprise student lenders are being hung out to dry for political gain. The Fed can open up the discount window to prop up investment banks, but can’t do the same for FFELP and Private lenders to help kids go to school?

   The Direct Loan program is no panacea. I’m quite sure that our government wasn’t established to lend money when private enterprise can do the same or better than bureacrats. Where’s the liberty in a government-sponsored monopoly?

   So, by all means, let’s continue the charade that the student loan “money changers” somehow deserve all this, and that there’s no problem here.

   — Patrick Bott    Mar 20, 09:49 PM    #

7. A few thoughts:

   I don’t think its the lending community that will get the sympathy or the ear of Congress. The schools have got to take a stand if they want to see the FFELP allow competition to control the market.

   It would be interesting for the Chronicle to do some research about the contracted agencies that administer the Direct program. Costs? Service levels? Default prevention measures? Are these contracts like Blackwater and Halliburton in the making?

   “Meet the new boss, same as the old boss.”

   — MDS    Mar 20, 11:43 PM    #

8. As long as students receive adequate access to loan capital and reasonable repayment terms and interest rates, does it really matter what we call it?? The real issue here is not FFELP versus Direct Loans! It is access to loan capital for students…

   — Alaska Joe    Mar 21, 08:05 AM    #

9. And in the mean time those of us out here working directly with students are wondering how all of this uncertainty will influence families making college choices. If the instability in our national economy weren’t enough now we’re confronted with double-talk about loans for students. Does the federal government really care about student access? This would be the time to show us.

   — KMH    Mar 21, 09:38 AM    #

10. Patrick – you decry Direct Lending as a government-sponsored monopoly and refer to FFELP as private enterprise, but the whole issue behind this is the Federal government subsidizing what have become quasi-private lenders. FFELP was established as part of LBJ’s War on Poverty, intended to provide access, and over the decades it has degenerated into one of the country’s biggest corporate welfare ventures. And if the fault with the evil Direct Lending (which so-called free enterprisers don’t like because it’s competition, which is what free enterprise is supposedly built around) is that it’s a government monopoly, then where is the private enterprise support for the Pell Grant program? The private sector seems to have no problem allowing that to be a government monopoly.

    CB is right, there are plenty of lenders, big and small, and I’m sure that many who have rattled their sabres in the aftermath of CCRRA will return even if the profit margin is a little less obscene than it used to be.

    — DS    Mar 21, 10:19 AM    #

11. Two thoughts / statements:

    1. According to the Department of Education, there were over 2,700 FFEL leders who made a loan last year.

    2. It is incorrect to say that FFEL is an example of private enterprise running a loan program since these private lenders receive subsidies to make loans. Only if the subsidies are completely removed would we have a true comparison of private vs. public administration of loan programs.

    — CK    Mar 21, 10:31 AM    #

12. This situation (& some of the above comments) is just another example of the extreme myopia that has pervaded our government – cut expenses now even though they would give returns several times greater over time. Of course, what else could we expect from the worst administration this country has ever seen & his little band of toadies that ruled over Congress for 6 years?

    — Gary    Mar 21, 11:20 AM    #

13. And this really is the tip of the iceberg. As the parent of a sophomore at a private college, we are depending partly on these government subsidized loans. If they begin to disappear, private colleges should wake up immediately and realize that this will affect the ability of their applicants to pay. And let’s face it, state colleges are offering truly quality programs and many of us parents are beginning to question why we would pay three times as much for a private undergraduate education.

    RTJ

    — Renee Jones    Mar 21, 10:36 PM    #

14. There is credit crisis, a severe one, and it will likely expand further into the student loan market. But it’s idiotic for the US to be funding college educations thru loans, and the federal subsidies given to lenders in this area would be better used as direct grants and or direct loans to students. Lower over head & no need for a profit margin, and then the federal funds would pay for more education. Maybe the credit crisis will be an opportunity for reform. Students should not be a vehicle for banks to make profits from federal dollars.

    — Marc    Mar 22, 05:39 AM    #

15. The Sky is not falling!

    — Observer    Mar 24, 12:43 PM    #

16. Hi there,

    I’m taking a Higher Ed Finance and Budget course and this is all a bit over my head. What impact will this have on the variety of schools? Non-profit private? Public? UC vs. community college? I assume it will affect the diversity in population of students.

    — Erin    Apr 14, 09:33 PM    #

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