College Student Loan Consolidations
Sallie Mae, the nation’s largest college student loan company, is taking another step away from the government backed college student loan business, further exacerbating the sense of crisis hanging over the industry.
Sallie Mae announced today in a letter to colleges that it would no longer offer college student loan consolidations under the federally guaranteed loan program. Students typically consolidate their loans after they graduate, combining loans from each of their years in college into a single student loan to make it easier to manage when paying back the money. Until recent months, college student loan consolidations had been regarded as a highly profitable activity for loan companies because college student loan consolidation usually occurs as students enter years of repayment.
A series of loan companies, however, has been quitting the system of federally guaranteed college student lending in recent months, blaming a combination of cuts in federal subsidy rates put into place last September by Congress and a credit crunch attributed to a surge in mortgage defaults.
Sallie Mae, in its letter today, reiterated that problem, saying that lenders responsible for more than 16 percent of all college student loans last year have now announced their departure from the government backed system.
“As a result,” Sallie Mae said in the letter, signed by its president, Charles E. Andrews, and its executive vice president, Barry Feierstein, “college student loan demand will significantly exceed lender supply for the upcoming academic year.”
As part of preparations for the possibility that some students might not be able to find willing lenders this fall, Education Secretary Margaret Spellings met here today with representatives of guarantee agencies — a group of 35 nonprofit entities that use federal money to repay college student loan companies when borrowers default — to discuss plans for lending federal money directly to students, on an emergency basis if necessary.
In addition to announcing the termination of its college student loan consolidation business, Sallie Mae told colleges that it would no longer pay for students the federally mandated origination fee on government backed loans. “With the large number of lenders exiting the program,” Mr. Andrews and Mr. Feierstein wrote, ”Sallie Mae cannot justify subsidizing some students at the expense of others who may be unable to get funds for college.”
SLM shares rose 23 cents to $17.85 in trading Friday. The stock price started 2007 at $48.80, but began to tumble in October, when Sallie Mae and an investor group led by private-equity firm J.C. Flowers & Co. failed to agree on terms of what originally was to be a $25 billion buyout worth $60 a share. The stock plummeted to $19.68 by year-end.
Sallie Mae reported a loss of $1.6 billion in the fourth quarter as it faced higher borrowing costs and set aside $575 million to cover bad loans. The company is due to report its first-quarter 2008 results next Wednesday.
Under the major federal student loan program, students can consolidate loans after they graduate or leave college. The interest rate on the college student loan consolidation is capped at 8.25 percent and is fixed for the life of the loan.
Sallie Mae said in its annual report for 2007, filed earlier this year, that it was no longer actively marketing federal consolidation loans — which represented 67 percent of its portfolio of government-backed student loans, a proportion it expected to decline steadily. The company said its college student consolidation loan business surged from 2003 to 2006 due to aggressive marketing and low interest rates.
