More community banking companies are abandoning student lending.
First Financial Bankshares Inc. in Abilene, Texas, stopped making the loans this month, as did Bremer Financial Corp. in St. Paul.
They cited the same reasons as scores of others that have already quit the business: thin margins and an inability to sell the loans.
Legislation that took effect in October 2007 reduced the subsidies to lenders on federally guaranteed student loans to the point where some say the business is barely profitable. And the securitization market for student loans dried up last year and has yet to revive.
Last quarter the $3.3 billion-asset First Financial sold off $73.7 million in student loans, or 87% of its total. It said this month it expects to sell the rest before the fourth quarter.
Scott Dueser, First Financial's president and chief executive officer, said the business had been profitable and, if the securitization market for the loans were to return and margins improved, the company would ramp up lending again. It has been offering student loans for 35 years.
"We made good money off of student lending in the past," he said. "It was lower-margin, but it was still a good business for us. We love the student lending business, and we'd like to go back to it."
Mark Kantrowitz, the publisher of FinAid.org and Fastweb.com, said that since the subsidy cuts took effect roughly 170 student lenders, including nonbanks, have exited the business.
Others said far more community banks have done so, but not made formal announcements. "Thousands have gotten out of it," said Dick Battig, the vice president for business development at Student Loan Finance Corp. in Aberdeen, S.D., which used to securitize student loans for community banks before the capital markets seized up. It still services such loans.
"The whole student loan industry has been turned upside down in the last two years," Battig said. "The subsidy is so low it is almost impossible to stay in the federal student loan program."
Harrison Wadsworth, a special counsel to the Consumer Bankers Association, said the Term Asset-Backed Securities Loan Facility has not helped. Under the facility, the Federal Reserve Bank of New York lends to investors, who use the money to buy securities backed by consumer loans. Besides student loans, the facility targets credit card receivables, auto loans and small-business loans, among other sectors. Though hampered by weak investor participation so far, the facility is intended to create demand for the securities so that lenders can sell their loans and use the proceeds to do more lending.
"It seems to have had no impact on the student loan space," Wadsworth said. One problem is that the loans to investors to buy asset-backed securities are only for three years but "student loans usually have lives of 10 to 20 years. That means after three years they have to be refinanced in some form or fashion, and that is an unknown at this point."
A spokeswoman for the $7.5 billion-asset Bremer said Monday that the company told the schools it serves last week it would no longer offer student loans. "Bremer stayed in the federal loan program longer than most other lenders, but severe market conditions, combined with poor returns, make it no longer economically feasible for us to continue to participate in these programs," the company said in a statement.
Dueser said First Financial was earning about 1.74% over 90-day commercial paper on student loans before the law changed in 2007. The margin then fell to 1.19%.
Last July, because the securitization market had stopped functioning, the Department of Education also set up programs to buy loans, or participating interests in them, directly from lenders.
But FinAid.org's Kantrowitz said the low margins have discouraged lenders from participating. "It is enough money to tread water and hope the credit crisis passes," he said. "It is not a lot of money from a profit point of view. It is a very low-margin business right now."
A late March release of lending activity for the DOE's programs showed several dozen lenders had participated, nearly all of them nonbank companies focusing on student loans. The exceptions were a few large banking companies, including the $101 billion-asset KeyCorp in Cleveland.
Lending that is kept on the books would not show up, but observers said the low number of banking companies in the program is an indicator of how few are still making student loans.
With capital tightening and higher-profit options available, more will quit the business line completely, they said.
Besides, the current administration has a proposal to phase banks out of student lending by yearend, replacing them with DOE as the sole lender.
Bankers like First Financial's Dueser are not pleased about that.
He said he does not believe the government will be able to help students and their families as well as First Financial's 10 subsidiary banks did. "I have a lot of parents that call us for help," he said. "We were there to do that. If a kid was having problems with a student loan, he could walk in, and we could help him with it. You aren't going to have that service at the federal level."
Dueser said that, despite the low profits, his company kept lending this long because it was a way to help students.
Analysts following First Financial said the company's decision to get out of student lending was not a surprise and that it probably would have little effect on earnings. Student loans only comprised about 3% of the company's portfolio, or $51.8 million, at yearend.
Dueser said that, if anything, quitting the business should improve earnings as the company reallocates those funds to buy bonds that pay higher rates.
"We are moving into a higher-yielding asset class, and that is going to help us," he said.
