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Circumstances beyond its control drove Sallie Mae into retail banking, but the venture, once a stopgap, is now the cornerstone of its survival strategy.
November 8 -
President Obama signed legislation Tuesday that takes private lenders out of the business of making federal student loans.
March 30 -
As Congress moves to enact a bill this week that would kill government subsidies for private student lenders, companies that relied on Uncle Sam must dramatically reposition themselves to stay competitive, observers said Monday.
March 22
Private lenders, never a big part of the student loan market, have exited in droves over the past few years. Now some analysts are warning that new potential legislation and an increasing wave of defaults could drive out the last few holdouts.
Sen. Dick Durbin, D-Ill., and Rep. Steve Cohen, D-Tenn., introduced legislation in May that would allow private student loan debt to be discharged in bankruptcy, reversing a change made in 2005. Some analysts have warned that if the proposal becomes a law, it would reduce what little demand remains for private student loan securitizations.
But that market is facing a more immediate problem: more students are falling behind on their loan payments, according to Claire Mezzanotte, a managing director of structured finance at Toronto credit rating agency DBRS.
The percentage of student loans in repayment that are 60 days or more delinquent has doubled to 4.9% in the second quarter of 2011 from 2.5% in the second quarter of 2006, according to DBRS. Gross defaults of 1.3% on private loans "continue to remain relatively high, at approximately triple the levels seen pre-recession," Mezzanotte writes in a report published Wednesday.
Students graduating with debt since the recession are facing an uncertain economy and high unemployment rates, which has made it more difficult for them to find jobs and start paying off their loans. Federal student loans generally offer repayment assistance, forgiveness and debt relief programs, but private lenders have been more reluctant to offer such forbearance programs, Mezzanotte writes.
The number of private lenders offering student loans has dropped to "just a handful" from more than 80 in 2007, due to players "either exiting the business when liquidity and funding dried-up, or through industry consolidation," Mezzanotte writes.
A recent law has also had an impact on the market. President Obama last year signed a law ending government subsidies to banks for participating in the Federal Family Education Loan Program.
Private student loan origination is estimated to fall to 10% this year, from 25% in 2007, according to DBRS, which cited reports from private lender Sallie Mae, the former SLM Corp., and the Department of Education.
Federal student loan origination volume has jumped 60% to $104 billion from 2007 through 2010, DBRS found.
Before that change, the private student loan market was relatively profitable and faced fewer restrictions than federal loan programs.
Now the remaining private student lenders are facing another potential blow. Students have not been allowed to discharge government-guaranteed loans in bankruptcy since 1978, but changes made to the bankruptcy code in 2005 disallowed private student loans from being discharged.
The legislation proposed by Senator Durbin and Rep. Cohen would once again allow privately-issued student loans to be discharged in bankruptcy.
Thirty-five organizations representing students, consumers, and higher education institutions have expressed support for the legislation.
