U.S. Bancorp (USB) is pulling out of the private student loans market and JPMorgan Chase (JPM) is sharply reducing its lending, as banking regulators step up their scrutiny of the products.
Minneapolis-based U.S. Bank sent a letter to participating colleges and universities saying that it would no longer be accepting student loan applications as of March 29, a spokesman told American Banker on Friday.
"We are in fact exiting the private student lending business," U.S. Bank spokesman Thomas Joyce said, adding that the bank's business was too small to be worthwhile.
"The reasoning is we're a very small player, less than 1.5% of market share," Joyce adds. "It's a very small business for the bank, and we've decided to make a strategic shift and move resources."
Meanwhile, JPMorgan Chase will limit student lending to existing customers starting in July, a bank spokesman told American Banker on Friday. The bank laid off 24 employees who make sales calls to colleges as part of its decision.
"The private student loan market is continuing to decline, so we decided to focus on Chase customers," spokesman Thomas Kelly says.
Banks and other private student lenders have already seen their role in the market diminish, after the federal government in 2010 stopped guaranteeing loans they originated. Now more lenders could follow U.S. Bank out the door, as the Consumer Financial Protection Bureau and other policymakers turn their attention to the student loan market.
"What we are likely to see over the next few months is a lot of private education lenders rethinking the product, particularly if it appears that the CFPB is going to become more activist," says Kevin Petrasic, a partner with law firm Paul Hastings.
"Historically there's been a patchwork of regulation towards private student lenders," he adds. "The CFPB allows for a more uniform and consistent approach and identification of the issues. It also provides a network, effectively a data-gathering base that is going to enable the agency to get all the stories that are out there."
The CFPB recently began accepting student loan complaints on its website.
"I think there's going to be a lot of emphasis and focus … in terms of what is deemed to be fair and what is over the line with collections and marketing," Petrasic says, warning that "the challenge for the CFPB in this area is going to be trying to figure out how to set consumer protection standards without essentially eviscerating availability of the product."
Outstanding student debt, including private and federal loans, has topped $1 trillion, surpassing previous estimates, the CFPB reported earlier this month.
But despite mounting regulatory concerns, some lenders including Discover Financial Services (DFS) are ramping up their participation in the market. Discover has snatched up several large student loan portfolios over the past year and is growing originations.
The student lending blog Cheapscholar.org first reported about U.S. Bank's letter to colleges and universities and the dismissal of some Chase employees.
@Neil W: While it's true that government subsidies do little to prevent cost inflation -- and often encourage it -- higher education and healthcare, which you have singled out for suffering "from chronic cost increases" are somewhat more complicated than you acknowledge and are only two examples of public policy that suffer from tremendous cost overruns due to federal funding. Cost increases in higher education have as much to do with increases in the availability of lending as they do with decreases in federal and state appropriations to education budgets due to ideological differences and a lack of taxpayer revenue. And without heath insurance -- not just Medicare and Medicaid -- there's no telling how expensive healthcare would be; in such a case, medical costs may be forced down but individuals would be required to foot 100 percent of the bill. Perhaps private banks could get in the business of making medical emergency loans for expensive procedures such as heart bypass surgery that come with high variable interest rates and a lack of bankruptcy protection, as private student loans do. And what about other industries which receive generous taxpayer subsidies and funding, such as oil and the military? Surely you're not suggesting there's no subsidy-encouraged cost inflation at the gas pump or dubious cost overruns when $500 hammers are used to install $1,000 toilets at the Pentagon?
@David B: A point of clarification: if Congress takes no action and lets the College Cost Reduction and Access Act of 2007 expire as scheduled this summer, the fixed interest rate on federal Stafford loans for undergraduate students will revert to 6.8 percent, where it was in 2007, from 3.4 percent. As expected, Congress is divided down party lines on whether to take action and extend the Act (Democrats support the extension, Republican oppose it).