Commercial lender CIT Group Inc. said Tuesday that it will outsource the servicing of $7.4 billion of government-backed student loans to the Pennsylvania Higher Education Assistance Agency.
PHEAA, which conducts its commercial student loan servicing as American Education Services, currently services about $1 billion of CIT's student loan portfolio.
The transfer of the $7.4 billion portfolio is expected to occur by March, the company said. As a result, CIT will close the offices of subsidiary Xpress Loan Servicing, which had been handling the servicing of the portfolio, in Cleveland and Cincinnati, Ohio.
"Our decision to outsource the servicing of our student loans reflects our ongoing efforts to improve operating efficiencies," John Thain, chairman and chief executive, said in a press release.
Xpress Loan Servicing ran into some trouble a few years ago when then New York Attorney General Andrew Cuomo began an investigation of the unit for potentially illegal dealings with university and government officials. In May 2007, CIT paid $3 million to settle the allegations. CIT stopped making all student loans in 2008.
Sameer Gokhale, a senior specialty finance analyst at KBW Inc.'s Keefe Bruyette & Woods Inc., said the move makes sense since private lenders must wind down their government-guaranteed student loan portfolios. In July, the government ended subsidies to private lenders for generating federal loans. PHEAA is one of four companies awarded a servicing contract from the Department of Education to service all loans under the new federal direct loan program.
"PHEAA can probably service it for cheaper cost per account," Gokhale said. "I think it makes sense from an economic perspective, but it's not significant or meaningful to the company's consolidated earnings."
Selling the portfolio, on the other hand, would have been a less appealing option, as the company likely would have had to sell it at less than par, he said.
