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Student Lenders Tiptoe Back To Market With Govt Bailout

Last Update: 6/4/2008 9:46:55 AM

DOW JONES NEWSWIRES

School’s out for summer, but some lenders are just getting back to campus.

After abandoning the Federal Family Education Loan Program over the past few
months, a number of companies are reconsidering whether they can make a profit
from the government-backed loans now that the feds have promised a liquidity
infusion into the struggling market.

Some lenders are still unmoved, as indicated by the recent decision by
Citigroup’s (C) Citibank to withdraw support from a number of two-year
institutions. The bank, which cited low loan volume in community colleges, lends
through its 80%-owned Student Loan Corp. (STU).

But many of the other 102 companies that scaled back or withdrew from FFELP are
expected to at least consider coming back for the 2008-2009 academic year.

Outfits like SLM Corp. (SLM) and Nelnet Inc. (NNI) reaffirmed their intentions to
originate new loans, quelling fears that the system providing more than $91.8
billion in loans to students and their parents could collapse. And at least two
other lenders that had abandoned the program, NorthStar Education Finance Inc.
and the Kentucky Higher Education Assistance Authority, signed back up after the
government revealed its one-year support plan.

Of the 60 or so lenders in the National Council of Higher Education Loan
Programs, an industry group for FFELP participants, “I think every one of them
changed their policies” during the credit crunch earlier this year, said
President Brett Lief. After the liquidity infusion last week, “I think they’re
all reviewing their policies again.”

Under the Ensuring Continued Access to Student Loans Act, the federal government
will buy lenders’ FFELP loans with Treasury funds at commercial paper plus 50
basis points and set up loan-backed trusts. The administration will pay private
lenders the loan’s full principal value, as well as accrued interest and a $75
bonus on loans made between May 1, 2008 and Sept. 30, 2009.

Even though some lenders are eager to play on the federal field again, they’re
not exactly excited about the rules.

Sallie Mae Chief Executive Albert Lord called the plan “barely okay” in a phone
call with college administrators, and Nelnet Chairman and Chief Executive Mike
Dunlap said the terms were “very marginal from a profitability standpoint.”

While the government-backed purchase price puts lenders in a much better position
than their sky-high worst of Libor-plus-150 on the secondary market this winter,
it still leaves them struggling. Before liquidity disappeared, student lenders
were securitizing bundled loans at the cost of Libor-plus-20.

In order to avoid a return to the red, lenders are expected to further trim
borrower benefits - like discounts for automatic withdrawals and on-time payments
- and may bring loan bundling efforts in-house.

“I think the lenders are going to be selective to come back in,” said Mark
Kantrowitz, publisher of student aid Web site FinAid.org. “I believe that a lot
of the state loan agencies will probably return, and the non-profits. But a lot
of the lenders that previously sold their loans on the secondary markets will not
come back in because the margins will be too thin for them.”

Nelnet’s Dunlap said in its first-quarter conference call May 22, the day after
the government revealed its plan, that the company could make loan originations
profitable “in the right cost structure.” He explained, “It makes sense to stay
in the program for another year and see what happens with the capital markets,
and see what happens with the government to see if we can come up with a solution
that ensures a long-term viability of FFELP. But if it was [Libor plus] 50 basis
points for an ongoing basis it would really make Stafford loans very marginally
profitable. We’d have to look at that and say, ‘Does it make sense to allocate
towards that business towards the long term if that’s where the capital markets
stay at?’”

Nelnet is already hedging its bets. Over the past six months it flipped its
business model so just 17% of revenue comes from its loan portfolio’s net
interest income, with the rest derived from fee-based services like tuition
payment processing and technical services. About 99% of Nelnet’s $26 billion loan
portfolio is in the FFELP market. Nelnet and Sallie Mae weren’t available to
comment for this story.

For those that do decide it’s worth the effort to get rid of the middlemen in the
secondary markets or just wade out the capital crunch, there’s still no guarantee
they’ll find customers for their loans.

“The question is whether the schools they’ve pulled out of will want them to
return,” points out Sameer Gokhale, an analyst with Keefe, Bruyette & Woods. As
schools create their “preferred lender” lists, which help direct students to
financial resources, they may prefer to partner with companies that never
withdrew from FFELP in the first place. Or they might switch to the government’s
direct lending option, which is expected to double its capacity to $30 billion to
accommodate Pennsylvania State University and a number of others who’ve given up
on FFELP and prefer to muddle through red tape to borrow directly from the feds.

The government’s current fix is only temporary, after all, and many industry
insiders believe lenders could once again be in crisis mode in May 2009. “This
means coming back in for a year, and then who knows what at that point,”
Kantrowitz said.

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