Student Loan Blog : Sallie Mae, FFELP

Overhaul of Student Loan System in the Works

Student Loan Girl — Mon, 22 Jun 2009 15:30:00 GMT

A bill to overhaul the student loan industry may reach Congress as early as next week; education-committee chairs are working behind the scenes on a piece of legislation that would eliminate the third-party student loan system called the Federal Family Education Loan Program, The Chronicle of Higher Education reports (“Behind the Scenes, a Student-Loan Overhaul Takes Shape,” June 16, 2009).

Although few details have been released about the proposed legislation, lenders and a large number of Congressmen are hoping the FFEL program won’t end up on the chopping block like President Obama has proposed. Already as many as 13 counterproposals to the elimination of FFELP have begun circulating Congress, including a detailed plan from lending giant Sallie Mae.

It’s not likely, however, that the FFEL program will survive this legislative session, some Congressmen say, considering taxpayers could see as much as $94 billion in savings over the next 10 years if FFELP were eliminated, according to estimates from the Congressional Budget Office.

Obama had originally suggested that these savings, which have been readjusted down to $87 billion, could be used to increase Pell Grants award amounts each year at a rate equal to the Consumer Price Index. It now looks like Congress will, instead, propose that the money be infused into the Pell Grant program to allow appropriators to “continue to set the maximum [Pell Grant] award” so as not to end up capping the maximum award amount.

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74% of Sallie Mae Loans Could Disappear Under Obama Plan

Student Loan Girl — Thu, 12 Mar 2009 19:21:00 GMT

Sallie Mae — the largest provider of college student loans in the country — may ultimately see three quarters of its student loan business evaporate under a plan by President Obama that would end government subsidies to third-party lenders and establish the federal government as the sole provider of federal student loans, reports Bloomberg.com (“Sallie Mae May Lose 74% of Loans Under Obama Budget,” Feb. 27, 2009).

Last year, the student loan giant made a total of $24.2 billion in student loans, with $17.9 billion, or 74 percent, backed or subsidized by the federal government.

If Obama’s plan is approved, students would no longer get their federal student loans through private third-party lenders participating in the Federal Family Education Loan Program — which currently provides the bulk of federal student loans to college students — and would instead get their federal student loan funds directly from the government through the Direct Loan Program.

The government’s new plan — a plan that financial analyst Matt Snowling of financial services firm Friedman, Billings, Ramsey & Co says has “blindsided” the student loan industry — threatens to reduce Sallie Mae to a debt collector and servicer for the government.

However, Sallie Mae isn’t likely to protest Obama’s new student loan strategy, says William Ryan, an analyst at Portales Partners, LLC, a New York-based stock rating service, since the lender is bidding on a contract to become the government’s servicer of student loans. That contract could bring in $250 million over four years according to analysts’ estimates.

While Education Secretary Arne Duncan has said that switching to government-funded student loans could save the government as much as $4 billion per year, Snowling says that the move could vastly alter the student loan marketplace, making borrowing much more difficult for students.

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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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