NEW YORK (MainStreet) The second largest federal loan program, the Federal Family Education Loan (FFEL) program, which provided money to 60 million Americans since it was created in 1965, was closed down when Congress passed the Health Care and Education Reconciliation Act of 2010. Before the Act was passed, the federal government backstopped the loans made by private lenders under the FFEL program with taxpayer dollars.
The 2010 Act cut out the banks' role as a federally subsidized middleman, which the Congressional Budget Office concluded would save Uncle Same $80 billion over the next ten years. Those funds were used to support low income students through Pell grants and similar programs. All federal lending is now made by the Direct Loan program, where funds go directly to colleges and universities before they are disbursed to students.
The value of FFEL loans that have not been paid off was believed to be in the $390 billion range as of 2011. According to Mark Kantrowitz, founder of the FinAid and publisher of Edvisor's Network which provides intelligence on student loans, what the top dogs in this market have in common is that they are all banks. The FinAid top eight consists of the following:
- 1. Sallie Mae continues to be number one in this market, but is effectively now a bank and is contemplating splitting itself into two companies, an originator of private student loans and a services of federal student loans.
- 2. Citi Student Loans shut down in 2010. Their federal loan assets were acquired by Sallie Mae while Discover Financial got their private student loans. Discover originated private student loans under the Citi Student Loan Corporation which had different loan terms, then shut Citi SLC down earlier this year.
- 3. Wachovia Bank's student loan operation, formerly #3, merged with #4 Wells Fargo when Wells Fargo bought Wachovia Bank in 2009 in a government-forced sale. Wells Fargo continues to make private student loans.
- 4. Bank of America stopped making private student loans in 2008, in the aftermath of the bankruptcy of The Educational Resource Institute (TERI), formerly the largest guarantor of private education loans, amid a wave of borrower delinquencies and defaults.
- 5. JP Morgan Chase ended private student loans to new borrowers in 2012 but continued making new private student loans to current customerssomething that is expected to come to an end.
- 6. PNC Bank continues to make private student loans.
- 7. U.S. Bank stopped making private student loans in 2012.
- 8. Discover has grown to become the #2 lender of new private student loans behind Sallie Mae.
Discover is not a new entrant and its market presence has grown since it acquired Citi Student loans, as has Wells Fargo. "Wells Fargo's acquisition of Wachovia's student loan portfolio was incidental to the acquisition of the bank," said Kantrowitz, "But it continues to be one of the top three education lenders."
But if banks threw caution to the wind prior to the 2008 financial crisis when it came to lending, they've displayed conservative tendencies since then, as the market for securitizing student loans has frozen.
The availability of financial student aid is likely to lag behind demand throughout the rest of the decade. Could this create an opening for private lenders to more aggressively enter the student loan market over time? It's anyone's guess, just as it hard to handicap the date when the last FFEL loan will be retired.
"Three-quarters of undergraduates are at public colleges, where per-student state funding is the lowest in over 25 years," wrote Lauren Asher, president of College Access and Success, in a USA Yoday editorial last September. "Meanwhile, the federal Pell Grant covers a lower share of college costs than ever before."
--Written by John Sandman for MainStreet