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April 24, 2008

For Student Borrowers, Chase Proves Elusive

Washington — Two months ago, as a sense of crisis descended upon the student-loan industry, JP Morgan Chase & Company stood up and said that it not only would continue to supply government-backed loans, but would do so at a discount.

“It sounds so self-serving,” a company spokesman, Thomas A. Kelly, said at the time, “but if you are doing business with a major bank doing student lending, they’re going to be there tomorrow.”

That was two months ago.

Last week the bank’s student-loan division, Chase Education Finance, announced that because of higher financing costs and lower federal subsidy rates, it would no longer offer government-backed loans at colleges with high-risk borrowers.

And today officials at Chase are telephoning the colleges that the bank is still willing to serve to tell them that the discounts it promised in February to maintain — reimbursing students for both the borrower origination fee and the default fee that are required under the federal program — will no longer be paid by Chase on the borrower’s behalf.

Chase provided about $3-billion in federally guaranteed student loans this academic year, the fourth-largest supplier in the government-subsidized program. Mr. Kelly said in February that Chase and other large banks could afford to stay in the program, and even offer discounts, at a time when other lenders were leaving because banks had their own customer deposits and therefore did not need to rely on securities or other forms of outside investment to finance their student lending.

Education Department officials, including the secretary, Margaret Spellings, have cited such assurances from Chase as evidence that the government-backed student-loan program should have enough willing participants this coming academic year.

Mr. Kelly said today, however, that he did not expect Chase to grow beyond the level of student lending it did this year.

“We’re still going to be there,” Mr. Kelly said today, “for as many people as we can afford to do.” —Paul Basken

Posted on Thursday April 24, 2008 | Permalink |

Comments

  1. Well, now we know—sh_t happens.

    Secretary Spellings was not the only one who cited Chase in arguing that everything was hunky-dory in FFELP. Paul Basken did. Luke Swarthout did. New America Foundation did.

    It was an argument of convenience, disingenuous in every regard. Truth be told, they are indifferent to FFELP’s fate.

    — Alex Hamilton    Apr 24, 04:00 PM    #

  2. Hmm. I’m sure Bear Stearns is a better credit risk than our students.

    — EK    Apr 24, 04:06 PM    #

  3. #1 is right….now we’ll hear from those same luminaries that a taxpayer-sponsored bailout is afoot!

    — Patrick Bott    Apr 24, 05:40 PM    #

  4. Congress killed these programs and now will scramble to have taxpayers bail it out. Dont blame Chase for doing the math.

    — DC    Apr 25, 10:20 AM    #

  5. Up til now, Chase denied there were any problems in the industry. Now it is only lending to a select list of schools and has admitted it can no longer waive fees. I hope this makes it clear to folks that there are big problems out there.

    — Lynn    Apr 25, 10:27 AM    #

  6. Congress took a 40-year-old corporate welfare program and took the first steps towards cleaning it up. There’s nothing in the Constitution that says colleges and students must have a choice of 3000 lenders. (There’s actually nothing in the Constitution about the central government getting involved in education at all.) From an economics standpoint, the correct number might be 500 lenders, or it might be 20. We don’t know because they have never tried economics in this program. In addition, the lenders’ temporary financial hiccups have nothing to do with the changes in the student loan programs. The non-bank lenders (who have long gotten higher subsidies, even in last years’ cuts), have been sideswiped by a municipal-bond crisis. The banks are feeling the side effects of the subprime mortgage credit averse behavior. Of course Chase was not immune. No one gets their capital for student loans from deposit accounts. It has long come from investors in Europe, Japan and China.

    — Craigie    Apr 26, 09:30 AM    #