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As many schools eliminate student loans or replace them with grants, several lenders are finding it hard just to stay in the game.
During the same week in March, HSBC Bank USA, M&T Bank Corp., both of Buffalo, N.Y., and Wayzata, Minn.-based TCF Financial Corp. all announced plans to discontinue federal student loans for the 2008-09 school year. The banks are among the 50 largest federal student loan providers. Combined, the three lent a total of more than $560 million of the $119.2 billion made in loans during the 2006 fiscal year, according to the latest data available.
The exit from the Federal Family Education Loan Program (FFELP) is a result of last year's College Cost Reduction and Access Act, when Congress cut federal subsidies paid to private lenders by more than $20 billion. While the federal subsidies helped reduce the interest rates on loans made under the FFELP, they squeezed profits lenders can make from the loans.
The announcements from the three banks came just days after Rep. Paul E. Kanjorski (D-Pa.) urged the Federal Reserve System to "ensure continued access" to student loans in a letter addressed to Chairman Ben Bernanke and signed by 31 other Congress members.
The letter asked the Federal Reserve to use its authority in "unusual and exigent circumstances" under Section 13 of the Federal Reserve Act to help non-bank lenders that issue highly-rated securities that back student loans. The Congress members also requested that the Federal Reserve allow primary dealers and issuers to use student loan asset-backed securities as collateral to borrow from the Term Securities Lending Facility, which was introduced in March.
FFELP lenders have financed more than $350 billion in outstanding loans for more than 35 years without fail, according to the letter. However, "during the past three months, turmoil in the broader capital markets has caused severe liquidity problems for student lenders that rely on access to credit markets to raise capital."
How does all this affect the collections industry? "I believe that the default rate on these loans will certainly rise and margins are going to be less for those that are collecting on these types of loans," says Michael Hernandez, a consultant in the education collections sector. "It's going to get much tougher because people need to pay their mortgage and car. Where does a student loan come in their paying sequence?"
