Federal Student Loan Lenders Fight for Survival

Student Loan Girl — Mon, 30 Mar 2009 23:52:00 GMT

In what is being viewed as a direct hit to private third-party lenders in the Federal Family Education Loan Program who are fighting to keep the program alive, the U.S. Department of Education’s preliminary data paints the FFEL program as a costly and ineffective system with a 7.3-percent student loan default rate, two whole points higher than the default rate for the Direct Loan Program (“Private Lenders Brace for Fight Over Student-Loan Role,” The Wall Street Journal, March 27, 2009).

Since its launch in the 1960s, FFELP has been the primary source of federal student loans. This year the FFEL program has already lent more than $56 billion in student loans, while the Direct Loan Program has lent just $20 billion. But President Obama has proposed axing the FFEL program, which costs the federal government billions of dollars in subsidies each year, in favor of the government’s Direct Loan Program, through which families borrow directly from the government.

FFELP lenders have said that the Education Department’s untimely release of the student loan default rate data — taken from fiscal year 2007 — was purely political since the government has never released preliminary default rate data and has never broken down the data by the two programs. Industry analysts say the data reflects the differences in the two programs: FFELP lenders typically cater to more students from for-profit schools who tend to default at a higher rate than students in the Direct Loan Program.

Department of Education officials have said they released the data in response to a U.S. Freedom of Information Act request from The Wall Street Journal and inquiries from Congressional leaders.

“It’s unfortunate the rates are being released before there is an analysis of them,” said Brett Lief, president of the National Council of Higher Education Loan Programs, a trade group that represents FFELP lenders and federal loan guarantee agencies. “This is very serious stuff and I’m saddened that it has come out like this.”

No Cut-and-Dry Solution to the FFELP Dilemma

While the Consumer Bankers Association, which represents certain FFELP lenders, has sent Congress a 2,500-signature petition asking legislators to reject the president’s proposal to eliminate the FFEL program, industry observers don’t see the battle over FFELP ending quickly or simply.

The Congressional Budget Office has said eliminating the program would save the government nearly $100 billion over the next 10 years, which President Obama plans to redirect to the Federal Pell Grant program. This potential funding boost for Pell Grants, which are awarded to the nation’s neediest students, could make it harder for legislators who support FFELP to successfully argue to keep the program alive.

However, some legislators who oppose the FFEL program face strong opposition from their home-state guarantee agencies that work with FFELP lenders to service college loans for students in their state. Legislators may also have to battle student loan giant Sallie Mae, which has said that keeping certain elements of FFELP might actually make it possible for the government to draw additional Pell Grant funding from FFELP itself. Sallie Mae has also pointed out that its borrowers, who partake in default prevention programs through state loan-guarantee agencies, are 30 percent less likely to default than direct loan borrowers.

“It’s certainly possible Congress would eliminate the program,” said Terry Hartle, a senior vice president of the American Council of Education, a trade group representing colleges and universities. “But it’s equally possible — and perhaps more so — to wring more savings out of the [FFEL] program and put the savings into Pell.”

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With Government’s Help, Lenders Returning to Federal Student Loan Market

Student Loan Girl — Thu, 05 Jun 2008 21:08:00 GMT

A number of lenders who abandoned the federal student loan market in recent months may be returning, in light of a new law designed to keep struggling lenders afloat, according to a Dow Jones Newswires article.

Many of the 102 companies that scaled back or withdrew from the Federal Family Education Loan Program, in which federal student loans are funded by private lenders, are expected to at least consider returning to the program for the 2008–09 academic year, writes Dow Jones reporter Melissa Korn (“Student Lenders Tiptoe Back to Market With Government Bailout,” June 4, 2008).

Brett Lief, president of the National Council of Higher Education Loan Programs, said every one of the lenders in his organization "changed their policies" during the credit crunch earlier this year — reducing or suspending their participation in the FFEL program. The 60 FFELP lenders that are members of the NCHELP reported that the changes were necessary because federal student loans were no longer profitable.

But after Congress passed the Ensuring Continued Access to Student Loans Act (HR 5715), which gives the U.S. Department of Education the authority to buy student loans from lenders who have been unable to sell them, those lenders are “all reviewing their policies again,” Lief said.

Before the passage of the act, Sallie Mae, one of the nation’s largest originators of federal student loans, was considering whether to remain in the FFEL program, and Nelnet, NorthStar Education Finance, Inc., and the Kentucky Higher Education Assistance Authority had left the FFEL program.

Under the new legislation, all four of these lenders have reaffirmed they will continue to issue new federal student loans. However, some lenders still question whether the government changes will ultimately be profitable despite the Education Department’s infusion of liquidity, while other lending banks, like Citibank, JPMorgan Chase, PNC, and SunTrust, remain unmoved.

These banks no longer offer student loans to certain colleges — schools that they have determined tend toward higher default rates, fewer borrowers, and smaller loan amounts that make business less profitable.

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Student Loan Blog : Brett Lief

Federal Student Loan Lenders Fight for Survival

With Government’s Help, Lenders Returning to Federal Student Loan Market