BofA, Citi Scale Back From Student Loans
Bank of America
(BAC) - Get Report
and
Citigroup
(C) - Get Report
this week became the latest lenders to scale back their student loan programs amid rising concerns about defaults.
Bank of America on late Thursday said it would exit the private student loan business, but continue to make loans backed by a federal loan program for students. Citi, meanwhile, said earlier this week that its subsidiary
Student Loan Corp.
( STU) would temporarily stop issuing loans at schools where profits aren't as high as they'd like.
The defections come at a time of stress for the student loan market, which has seized as investors' appetite for packaged debt has dried up in the credit crisis. Some 60 companies have exited the student loan market recently putting pressure on the remaining providers.
Sallie Mae
(SLM) - Get Report
, the nation's largest student loan lender, warned on Thursday that it will lose money on every federally backed loan it makes. That came a day after Sallie reported a
first-quarter loss of $104 million
.
BofA and Citi's decisions have a domino effect on companies that specialize in the roughly $85 billion education financing market. Some 75% of federal student loans are issued by lenders that primarily raise money by bundling those loans into securities that institutional investors had bought.
First Marblehead
(FMD)
, whose stock price has plummeted more than 90% as the credit crisis has unfolded, is losing a major source of revenue in BofA. The bank on Thursday terminated its agreement with First Marblehead, after The Education Resources Institute, or TERI , the Boston non-profit that guaranteed the loans it packaged and sold, filed for bankruptcy earlier this month.
On Friday, Student Loan reported its first-quarter earnings, which have dropped a whopping 65% from the previous year's quarter.
Sallie Mae CEO Al Lord, during a conference call Thursday, said loan demand was running at $3 billion a month, while the company has only been able to access funding of about $1 billion a month -- at record-setting costs.
The situation in the student loan market and the flood of applications at Sallie Mae has pushed the company to look to Washington for help.
The House of Representatives on Thursday overwhelmingly approved a bill to address the problems in the student loan market. With a vote of 383-27, the bipartisan legislation will direct federal financial institutions, including the Treasury Department's Federal Financing Bank, to pump liquidity into the student loan market.
It will also allow the Education Department to buy federally guaranteed student loans from lenders unable to sell them in the secondary market, and push capital to colleges through state guaranty agencies. The Senate has a similar bill pending.
However, Goldman Sachs analyst James Fotheringham is worried about the negative impact of the legislation on Sallie Mae.
"First, legislated liquidity relief may shift Sallie's mix toward less-profitable
Federal Family Education Loan Program loans; second, potential funding to enhance the Direct Loan Program may erode Sallie's market share," he wrote Thursday. Fotheringham cut his estimates and lowered his price target for the lender.
In the near term, the stocks were buoyed by soaring equity markets. BofA was moving up 3% to $38.60. First Marblehead was jumping 9.2% to $3.68, Student Loan jumped 1% to $106.07 and Sallie Mae was up fractionally to $17.28.