Few occurrences can change a market as much as legislative change, and with the September 27, 2007 passage of the College Cost Reduction and Access Act of 2007 (CCRA), the student loan market will continue to see significant shifts in 2008.
CCRA promises to affect everything from interest charges to repayment schedules of federally-backed student loans. Most notably, CCRA will cut certain payments and fees to lenders over the next five years.
These subsidy cuts include the elimination of the “Exceptional Performer” status that allows lenders to receive higher insurance rates on defaulted loans, and reduces the insurance paid by the federal government to lenders on defaulted loans from 98 percent down to 95 percent by October 1, 2012.
Further impacting profitability is an increase of the loan fees paid to the Department of Education by lenders – that cannot be passed on to borrowers – from 0.5 percent to 1 percent of the principal amount of newly originated loans.
In addition, guarantors of federally-backed student loans will be allowed to keep a maximum of 16 percent of what they collect on a defaulted loan, down from the current 23 percent.
These are important considerations for the student loan collection marketplace. Lender profits will be pressured by the reductions in fees and insurance while collector income will drop with the cut in what they can keep from their activities. Indeed, leading student lender Sallie Mae reported recently it expected CCRA will “significantly reduce and could possibly eliminate the profitability of making new federally-backed student loans.”
This will send more firms to explore the private student loan market. These loans constitute the smallest segment of the market, but are the fastest growing, expanding from 5 percent of the market in 1995 to 19 percent in 2005, according to the Institute for Higher Education Policy. Much of that has occurred as college costs skyrocketed and students were forced to seek other loan sources to pay their bills. In 2005, $19 billion in private student loans were originated.
Currently, 17 percent of Sallie Mae’s $28 billion portfolio is made up of private loans. Sallie Mae recently indicated it would accelerate its push into private student loans because its federally guaranteed business looked flat as the CCRA changes are fully realized over the next five years ("Sallie Mae to Push Private Lending," Dec 28, 2007).
This shift by Sallie Mae most likely precedes a general market shift and increased origination by other active players such as JP Morgan Chase, Bank of America, and Citibank.
Read Dimitri’s previous analysis on private student loan lending: "Private Student Loans Could Graduate into Major New Debt Market," Dec 20, 2007).
Dimitri Michaud analyzes trends in strategic receivables management within the consumer finance sector, including the banking, credit card and mortgage markets. He conducts research, writes publications and hosts a regular blog on insideARM.com for Kaulkin Media.