A survey shows that one in five bankers is studying whether to continue making students loans, as the advent of direct lending by the government threatens volume-driven profits.
The Consumer Bankers Association found that 22% of the banks now participating in the Federal Family Education Loan program are evaluating whether they will continue to participate. So far, only one of the 53 banks surveyed said it had quit making the loans.
"That number doesn't surprise me at all," said CBA president Joe Belew. "Probably the sentiment is that they are going to stay in the program, but if they get out, it may be in four years when direct lending is supposed to be fully implemented."
The survey comes as the U.S. Department of Education this summer rolled out its direct lending option, with a goal of making 60% of guaranteed student loans by 1998.
Bankers responding to the survey said their main concern was that the new direct lending effort would siphon loan volume that makes their own programs profitable now.
But direct lending is not the only challenge for student loan bankers. A longer-term issue is the push by the Student Loan Marketing Association, Sallie Mae, to become the first fully privatized government-sponsored enterprise.
Sallie Mae's ambitions got a boost last month when Treasury Department officials said they were favorable to gradually eliminating the restrictions now placed on the investor-owned company. However, in an Aug. 23 letter, officials were careful to say they were not yet making a specific recommendation to Congress.
Still unresolved is the issue of whether Congress would require Sallie Mae to make an exit payment of some kind to the federal treasury. Analysts have said that stockholders are not likely to favor any significant transfer.
A spokesman for Sallie Mae said the company was optimistic about the prospects for full privatization, but cautioned that the legislative process has yet to begin. The company is now restricted to making a national secondary market for student loans.
Bankers are skeptical of privatization because it could create a powerful new financial services company able to enter new businesses. Sallie Mae has been tightlipped about its future plans.
"The real question is what is the strategic direction of Sallie Mae," said Mr. Belew.
The Consumer Bankers Association has yet to take a formal position on the future of Sallie Mae, but a spokesman said freeing the agency could be premature.
"The direct loan business is not yet a foregone conclusion," said Fritz Elmendorf, spokesman for Arlington, Va.-based CBA. "We would want congressional hearings that would see some continuing role for Sallie Mae in the student loan business."
Specifically, he said that the absence of Sallie Mae as a secondary market provider could drive many community banks from the business. Mr. Elmendorf said one option would require Sallie Mae to continue buying student loans. "It's not certain that the only option is to set them totally free without restrictions," he said.
