NEW YORK (MainStreet) — People just out of college—or out for a decade or more--look at their student loan balances and see a drain on their pay checks and cash that they’d like to invest elsewhere. Increasingly, banks look at student loan balances and see risk, red tape, and cash they’d like to invest elsewhere.
Students have few options. Banks can stay in the business or get out. Discover and Wells Fargo, for example, are in it for the long haul and even say they’re ready to cut deals on income-driven repayment. Bank of America looks ready to move on from its federal loan portfolio if last month’s earnings call is any indication.
B of A's chief financial officer, Bruce Thompson, told analysts that it moved a $2.7 billion portfolio of consumer loans into held-for-sale status, which sources say is the bank’s student loan portfolio.
The entire portfolio is believed to be made up of federally guaranteed loans from the Federally Family Education Loans (FFEL) program, which ended in 2010 and was replaced by the Direct Loans programs.
Those FFELP loans have a significant shelf life. According to Department of Education data, there are $4.2 billion in FFELP loans made to 300,000 people who were still in an in-school status. But the FFELP universe is much bigger and consists of $387.6 billion in loans made to 20.2 million recipients. Broken out by repayment categories, roughly 61% of FFELP loans are in repayment, with 20% in deferment of forbearance and 16% in default. About 1.5% are in in-school grace period status.
”FFELP loans are in a wind-down situation," said Mark Kantrowitz, senior vice president of Edvisors.com, who was addressing FFELP loans in general and not Bank of America's loans specifically. "The cost of servicing loans is proportional to the number of borrowers while the revenue is proportional to the number of loan balances. When the cost of servicing the loans exceeds the revenue, the lender will start losing money on the portfolio."
"If the lender wants to get out of the business," Kantrowitz continued, "they will need to sell the portfolio long before that point is reached. Lenders with larger portfolios have more economies of scale that reduce the cost of servicing. So, generally, lenders that hold smaller portfolios will want to either sell off their portfolios to larger lenders or acquire other portfolios” to increase their holdings.
Even if Wells Fargo still originates loans, it's a seller in the FFELP market, too. Navient, which spun off last year from Sallie Mae, acquired FFELP loans from Wells Fargo to the tune of over $8.5 billion in November.
Sources say the two strongest bidders for Bank of America’s loan portfolio may be Nelnet, which got CIT group’s student loan business for $3.6 billion last year, and Navient, the largest student loan holder and servicer. Navient and Nelnet will be able to service any FFELP loan portfolios that they buy.
“Lenders who are servicers in the Federal Direct Loan program or who are continuing to make private loans are more likely to acquire FFEL loan portfolios,” said Kantrowitz.
Spokespersons at Navient and Nelnet could not be reached for comment. Jerry Dubrowski, Bank of America’s senior vice president for corporate communication said, “We have no update at this time on our student loan portfolio.”
The impetus behind Bank of America’s FFELP sell-off may be the need to redeploy cash for other lending opportunities that are demonstrating a stronger demand as the economy improves. JPMorgan Chase has already pivoted from student loans to auto loans. Incidentally, Millennials are a target market for both.
--Written by John Sandman for MainStreet