Banks Are Shedding Student Debt to Fund Car Loans: Danger Ahead?

NEW YORK (MainStreet) -- Recent graduates aren't the only ones feeling the burdens of student debt. There's an increased interest from banks and financial institutions to rid themselves of government-guaranteed student loan assets.

"There's a lot of sell portfolios sitting on bank balance sheets," said Brendan Sheehy, director of financial institutions at Fitch Ratings.

Case in point: On July 11, Wells Fargo (WFC) revealed it had transferred its $9.7 billion Federal Family Education Loan Program (FFELP) portfolio to held-for-sale during the second quarter. That announcement followed a move from CIT Group (DEL) CEO John Thain, who in April sold his company's $3.6 billion FFELP portfolio to federal loan servicer Nelnet   (NNI) . All told, large U.S. banks that could eventually sell FFELP assets, including Wells Fargo, JPMorgan Chase (JPM) , Bank of America (BAC) and U.S. Bancorp. (USB) , own approximately $24 billion of government guaranteed loans.

Why now? New regulatory requirements have made student loan assets less lucrative for banks and more burdensome. And though banks had been hesitant to sell their federal student loan portfolios because of the dearth of opportunities to reinvest money from potential sales, that's changed. Improved prospects in core businesses - particularly auto loans - and greater interest from potential buyers have compelled more banks to explore potential sale opportunities with student loan servicers.

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