Student Loans Keep Flowing

Student loans keep flowing



Despite some banks' decision to discontinue their student loan programs, federal student lending is rebounding due to aggressive government efforts and an influx of cash to fund private loans, according to experts.
"Federal loans are going along fine," said Cathy Malnichuck, director of financial .The University of Wales Online MBA at Robert Kennedy College, Zurichwales.college.chChina LED displayProfessional LED Display factory Lifetime Warranty, Prompt Delivery!CanadaImmigration program for Businessmen Professionals and Senior Managers.
"Some students had to change banks, because their banks went out of the business, but there are other banks taking up the slack."
A host of banks exited student lending last year including the College Loan Corp., TD Bank (formerly Commerce), M &T Bank and HSBC, creating concern among financial aid officers over a general exodus.
But Citibank, Chase, Sallie Mae, Nelnet and many others remain active in a market that has grown exponentially over the past decade.

Private student loans rose from $3 billion in 1997-1998 to $16.2 billion in 2006-2007, before dipping slightly to $16.1 billion in 2007-2008, according to the College Board. But that was far from the meltdown many feared.
In at least one recent sign of a rebound, Sallie Mae obtained $1.5 billion in financing from Goldman Sachs for private student loans.
"They're getting the money they need," Malnichuck said of students turning to federal and privately funded loans. "Is it costing them more to get that money in the private market? It probably is."
Frills on federal loans aren't as favorable as they once were, since banks no longer compete with discounts and perks based on payment options.
"Borrower benefits at this point have gone by the wayside," said Justin Draeger, vice president of planning for the National Association of Student Financial Aid Administrators in Washington, D.C.
Malnichuck said banks no longer pay for loan origination fees or sheer off 0.25 percent on interest in return for automated payments.
"They're not doing that anymore," Malnichuck said. "The loans have become more the same no matter who you're borrowing from and regardless of the borrower."
Interest rates on some loans, however, are actually dropping, making money cheaper. While subsidized Stafford loans issued through July 1, 2008 carry 6.8 percent interest, the rate falls to 6 percent for loans issued from that date through July 1, 2009. Rates continue to fall to as low as 3.4 percent for loans disbursed after July 1.
Draeger said the student lending market in 2008 looked like it could collapse when banks found they could no longer securitize and sell the loans.
"From our perspective, the cause for lenders dropping out of the program was they couldn't raise funds," Draeger said. "No bids were there to securitize their funds."
That brought the student loan market dangerously close to a meltdown as lenders, unable to securitize loans, were stuck in a stalemate.
"The market for that dried up," Malnichuck said. "Banks could not sell the securities that backed student loans."
But Draeger said Congress helped stabilize the market last May by passing the Ensuring Continued Access to Student Loans Act, which let lenders sell new loans to the Department of Education.
"I think it stopped a mass exodus of lenders, who had been leaving in droves," Draeger said. "We saw a stabilization."
Shortly after the bill's passage, Sallie Mae - the nation's largest student loan provider - said it would continue providing federal student loans. Malnichuck agreed the federal government's move to buy student loans bolstered lending, but noted, "Nobody jumped back into the business because of it."
The Department of Education in the next few months plans to purchase student loans dating back as far as 2003, which could lure other lenders to the sector.

"It'd be good news for lenders that didn't have enough cash up front to participate," Draeger said. "They might be able to re-enter."
And Gov. David Paterson in his state of the state speech said he would like New York to begin offering student loans, which could provide another cheap source of funds.
"States have a long history of providing student loans," Draeger said. "States can offer benefits that meet the unique needs of their students."
States sometimes target lending in professions with shortages, such as nursing or teaching. But New York's lending program, if it ramps up, could target students regardless of area of study.
"I think it would help," Malnichuck said. "I would like to see another government program that provides additional inexpensive funding to students."