The Student Loan Market
April 17, 2008
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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.
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