Student Loan Blog : student loan market

Revised Federal Reserve Plan Could Boost Student Loan Lending

Student Loan Girl — Wed, 11 Feb 2009 23:52:00 GMT

Student loan lenders and holders of student loan securities are set to be among the beneficiaries of a $1 trillion government plan unveiled by Treasury Secretary Timothy Geithner this week to jump-start the credit markets and encourage private sector lending, CNNMoney reports (“$1 Trillion To Boost Lending,” Feb. 10, 2009).

As part of the Consumer & Business Lending Initiative, an expansion of the Bush administration’s $200 billion Term Asset-Backed Securities Loan Facility, the Federal Reserve will commit an additional $100 billion to be used for the purchase of top-rated securities backed by debt, including student loans, auto loans, small business loans, and credit cards. The Obama administration said the program could deliver as much as $1 trillion to public and private sectors to revitalize lending.

Despite skepticism from analysts about the program’s potential to boost activity in the credit markets, Geithner emphasized that the plan is one part of the two key components needed for economic recovery to take effect. The other component would be addressed by the Obama administration’s stimulus bill if it passes.

“It is essential for every American to understand that the battle for economic recovery must be fought on two fronts,” Geithner said. “We have to both jump-start job creation and private investment and we must get credit flowing again to businesses and families.”

The Federal Reserve will use the $100 billion it has committed to the program to offer loans to investors in exchange for securitized collateral — student loan debt included. Investors would be required to provide the Fed with a small portion of the total cost of the securities upfront, before being able to receive the loan from the Fed to buy the securities.

CNNMoney explains, for example, that if a bank issues a batch of securities worth $1,000, a hedge fund investor could give the Federal Reserve $50 in return for a $950 loan that the hedge fund investor would use to buy the bank’s securities. The bank would then recoup its $1,000 investment in the securities, enabling it to make new loans, while the hedge fund would get a new infusion of cash that would have the potential to increase in value if the security’s value goes up.

If the program succeeds in helping to unfreeze the credit markets, which Scott Hoyt, senior director of consumer economics at Moody’s Economy.com says “it certainly has the potential” to do, it may encourage more lenders to return to the student loan market and it may allow student loan lenders to be able to loosen their credit requirements for lending, making it easier for more students to qualify for college loans.

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Defaulted Student Loans Stuck in Credit-Freeze Induced Limbo

Student Loan Girl — Tue, 10 Feb 2009 18:52:00 GMT

Thousands of student loan borrowers who have defaulted on their student loans — including 15,000 additional borrowers each month — are being forced to remain in default despite their efforts to bring their loans back into good standing, The Chronicle of Higher Education reports (“Credit Freeze Leaves Thousands of Student Borrowers Stuck in Default,” Feb. 13, 2009).

“I’ve done what I’m supposed to do, and they’re holding me hostage,” says Judy Ellis, a borrower who has made nine on-time payments to bring her student loan out of default. “I want to make this right, and I want to move on.”

But Ellis can’t move forward because the stagnant credit markets have made it harder for student loan guarantors to sell these “rehabilitated” loans back to lenders. A borrower must wait for the guarantor to find a lender to buy the defaulted loan before the loan, and the borrower’s credit, can be restored to good standing.

Currently 19 of the nation’s 35 student loan guarantee agencies, the companies who insure student loans against default, have no buyers for the rehabilitated student loans they hold. The market for rehabilitated loans has been effectively shut down for months due to the credit crisis, and in November, SunTrust, the only commercial bank that was still buying rehabilitated loans, exited the market.

Now, says Timothy Fitzgibbon, vice president for debt-management services at the National Council of Higher Education Loan Programs, nearly $150 million in debt is piling up every month on top of an existing backlog of loans awaiting rehabilitation.

Guarantors Awaiting Legislative Action

Consumer advocates say changes need to be made quickly before borrowers get so fed up with being “stuck” in default that they stop paying their student loans altogether, which could lead to more defaults and re-defaults.

“The last thing we want is for people to pack it in and say, Oh, never mind,” says Michael Ryan, vice president of borrower services for American Student Assistance, the student loan guarantor in Massachusetts.

Legislation passed by Congress last year authorized the Department of Education to buy up student loans from guarantors, but the legislation only approved the department to purchase loans made after 2003, and most rehabilitated loans that guarantee agencies hold predate that.

Guarantors believe that with creative interpretation of the law, allowing almost-rehabilitated loans to be considered “new,” the Education Department could use its authority from the bailout to buy up more loans. But Fitzgibbon argues that “it would be much cleaner to get a legislative fix,” which could come as part of a proposed spending bill or as part of revisited legislation from the previous session of Congress, than for the Education Department to reinterpret its purchasing authority.

“While this is being sorted out,” says Deanne Loonin, a staff attorney with the National Consumer Law Center, guarantors should stop collecting on the loans — a step guarantee agencies aren’t likely to take. Guarantors are encouraging borrowers whose student loans are currently frozen in default to continue making payments until buyers can be found.

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Student Loan Lending Still Going Strong

Student Loan Girl — Mon, 12 Jan 2009 23:34:00 GMT

Despite being hampered last year by a lack of investors and a lack of access to credit, federal student loan lenders are surviving the economic crisis — making the student loan market one of the few lending industries still able to thrive this year, The Wall Street Journal reports (“Tuition Ammunition: a Happy Lesson on Lending,” Jan. 6, 2008).

Proactive and swift action by the federal government, which guaranteed 18.6 percent more student loans for the 2008-09 academic year than the previous year, has helped the student loan industry avoid the decreases in volume seen by the mortgage and banking industries.

In addition to a move by the Treasury Department to infuse tens of billions of dollars into U.S. banks so lenders could issue new student loans, Congress passed legislation that allowed the federal government to buy up student loan securities from cash-strapped lenders.

The Ensuring Continued Access to Student Loans Act (HR 5715) was intended to help student loan lenders, allowing the government to buy loans directly from these lenders, and may have contributed to a 9.4-percent climb in loan originations for the 2008–09 academic year by lenders in the Federal Family Education Loan Program (FFELP). While the legislation has been in place, the government has purchased about $97 million in student loans and invested nearly $10 billion in student loan trusts, figures that are expected to grow before the end of this school year.

“What we’ve seen so far is that programs we have put in place are having the desired effect,” said Education Secretary Margaret Spellings. Although she’s optimistic that the government’s efforts to boost student lending are working, she said she’s not ready to “declare any victories.”

Credit Markets Hinder Private Student Loan Lenders

While federal student loan lenders seem to be riding out the economic storm, observers say it’s unclear whether the private student loan market, which is suffering greatly from the credit crunch, will experience the same success.

After the market for selling bundled student loan securities dried up, the Federal Reserve initiated a $200 billion program in the hopes of encouraging investors to continue buying these securities. Analysts say, however, that these efforts may not be enough for the private student loan industry to compete with the demand for and the availability of low-cost federal student loans.

Last school year, private student loans accounted for about $17.6 billion, just one-fifth of the $85.9 billion in total student loan lending, according to the College Board. This year, lenders and analysts estimate that private student loan lenders have done 25 percent less business.

Already 39 lenders have stopped making private student loans, and others have tightened their lending criteria, both of which may force financially struggling families to pursue more affordable higher education options, said Tim Ranzetta, president of Student Lending Analytics, an independent research and advisory firm. “The cloud of this financing issue,” Ranzetta said, “will push more [students] to state public universities and community colleges.”

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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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Bank of America Backs Out of Private Student Loan Business

Student Loan Girl — Sat, 19 Apr 2008 13:03:00 GMT

On April 17, Bank of America Corp. notified student-loan packager First Marblehead Corp. that it would no longer offer private student loans, focusing instead on providing federal student loans. Bank of America’s announcement comes amid increasing unsteadiness in the federal student loan market, where nearly 50 non-government lenders in the last six months have suspended their federal student loan programs.

Bank of America exercised its right to terminate its agreement with First Marblehead after The Education Resources Institute, the Boston-based nonprofit that guaranteed the loans packaged by First Marblehead, voluntarily filed for Chapter 11 bankruptcy protection on April 7, 2008.

Bank of America’s decision delivered yet another financial blow to First Marblehead, whose shares have already been on a downward spiral over the past few weeks, tumbling 37 percent on April 8 alone, the day after TERI filed its bankruptcy petition.

Shares in First Marblehead fell another 17 percent to $3.37 on the heels of Bank of America’s announcement, with the stock down nearly 91 percent over the past year. The loans originated by Bank of America accounted for about 15 percent of First Marblehead’s total revenue for the 2007 fiscal year, according to a Boston Business Journal article (“First Marblehead Loses Major Customer, Revenue Source,” April 18, 2008).

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