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The Student Loan Market



April 17, 2008 – Comments (8) | RELATED TICKERS: BAC , FMD , SLM

Recently Sallie Mae CEO Al Lord said, "We've been predicting something of a train wreck" in regards to the credit markets and the market for student loan lending.  Due to the ongoing disruption/disfunction in capital markets and the cut in federal subsidies [to certain student loans], many lenders have found federal and/or private student loans to be an unattractive and likely unprofitable market for them.  Due to this, many lenders are ceasing private loan activity and a wave of competitors [particularly smaller ones] are predicted to leave the industry.  Some already have.  This afternoon, Bank of America decided to stop offering private student loans at this time, though they will continue to participate in lending for federal loans.  Sallie Mae has also implied that continuing to make student loans going forward could put them in a position to take losses, and if that were the case, they too would slowdown or cease that activity.

This is an issue that has yet to hit main street full force, but over the next few months will unless something is done about it.  Current and prospective students who may need to obtain financing may find it difficult to do so, particularly for private student loans.  Although the short-term potential profit in the private student loan market appears to be very low, the fundamental demand for financing sources by current and future students remains great.  The "funding gap" between the federal loan limits and the actual cost of tuition is still sizable.  For many students, this gap is filled by private student loans supplementing their federal borrowings or perhaps from parents taking equity out of their homes to help pay for their kids' college costs.  Unfortunately, with the decline in the housing market the latter is not much of an option for many families.

Most of the college loan application process related to the academic school year starting in the fall  [2008] typically starts around now and continues through early to mid summer [2008].  With the fundamental demand by students for financing the cost of college remaining relatively strong and the availability of financing available [at reasonable rates] declining, it does indeed seem like it could be a "train wreck" in the works.  It will be interesting to see how this situation plays out over the next six months.

8 Comments – Post Your Own

#1) On April 17, 2008 at 6:06 PM, btown819 (87.07) wrote:

To put some more numbers to the story... According to a recent article in the Wall Street Journal...

"In 2006-2007, students and their parents took out an estimated $17.1 billion in private loans, up from $1.57 billion in 1996-1997, according to the College Board. Private loans accounted for 22% of all college borrowing in 2006-2007."

That's still a sizable market that has yet to be adequately addressed...

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#2) On April 17, 2008 at 7:26 PM, dwot (28.88) wrote:

I am not sure where all the new graduates expect to get jobs... 

Business often says they can't find qualified workers but what it really means is qualified workers at wages they are willing to pay.


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#3) On April 17, 2008 at 8:05 PM, btown819 (87.07) wrote:

I can't really speak to that, because I know many graduates are going into fields other than business.  I've only been out of school a few years and know it can be tough starting out.  Even now I know of people who have been out of school only a few years and still are in entry level positions [mostly within business] struggling to move up the ladder a bit.

When I moved into this apartment, one of my roommates was only out of school a year or two and was struggling to make it.  He was terribly underemployed and barely getting by.  Fortunately this past January he got a new position that wasn't going to make him rich by any means, but was a significant pay hike and would allow him to pay the bills each month and even slowly pay down his debt.  I know during his struggle the last several months there was one point at which he told me "I haven't paid my student loan in months."  I also know for a fact he was three months behind in most of his portion of utilities before he started to pay some again.  I am certain he is not exaggerating.  As much as it seems like he is going to default, I am confident that he will eventually continue to repay his student loans even if they are late once he settles in to this job and gets "back on his feet" financially.

With a slowing economy, I'm not sure how more recent grads would fare... 

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#4) On April 17, 2008 at 8:11 PM, btown819 (87.07) wrote:

I am not a recent grad, but not dramatically far from it.  I was unexpectedly laid off from my position over a month ago related to "an economic downturn".  Fortunately I am more qualified than a recent grad, but bordering on either underemployed or "behind" in my career path compared to others in my career path or ones similar to it.  Even with my work experience [but no jobs held beyond entry level] it has still been difficult to find a position.  Fortunately I've saved some of my money to weather this unexpected period of unemployment and I am expecting to get at least one job offer next week.

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#5) On April 21, 2008 at 1:08 AM, dwot (28.88) wrote:

Good luck.  The job market was crap when I got out as well.

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#6) On April 21, 2008 at 2:01 AM, dwot (28.88) wrote:

This might be of interest, on education...

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#7) On April 22, 2008 at 12:20 PM, btown819 (87.07) wrote:

Thanks for the link.  Attending college really is an investment, but it has also become a social norm for kids of many middle class families.  From my experience, many students and their families typically evaluate schools by their class/tier and whether or not they can "afford it" [i.e. cash/loans].  The cost of education relative to the expected return on investment on an individual basis typically isn't considered very strongly.

After all, many students start college without a clear major or career path in mind.  In addition, many students switch majors after enrolling in college or even begin careers after college that are only loosely related to their field of study.  This is likely to result in a different projected return than for an individual who started a career directly related to their field of study.  These factors also make it less likely that the individual borrower would be able to accurately forecast their return on investment and as a consequence, they may be less sensitive to price.  Therefore, "am I able to pay and borrow enough" becomes the manner in which the individual evaluates cost.

Less price-sensitive customers coupled with goverment incentives (federal loans) has resulted in consistently high demand for education in more recent years.  This strong  consistent demand has allowed colleges and universities to increase their tuition year after year without significantly decreasing demand.  Now that the financing environment has changed [at least temporarily], it will be interesting to see how the customers' [potential students/borrowers] preferences change, if at all, and how that in turn affects demand. 

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#8) On April 22, 2008 at 6:17 PM, btown819 (87.07) wrote:

On an unrelated note... I received and accepted a job offer this morning.  I'm breathing a little easier now.

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