Student Loans: first mortgages...now student loans

Sallie Mae Unsure About Future Loans


Top executives are holding "daily deliberations" about just how long the nation's largest student lender can afford to sacrifice its bottom line for the sake of college-bound Americans, Sallie Mae CEO Albert J. Lord said Thursday.

Experts said that, unless the government intervenes or market conditions rapidly improve, Sallie Mae could have no choice but to stop writing new federally backed loans.

House lawmakers on Thursday approved a measure to boost the availability of credit for Sallie Mae and other student lenders, and analysts believe the Treasury department could act as soon as next week.

Sallie Mae lost $104 million in the first quarter as it grappled with higher borrowing costs, restructuring charges and other factors, though Lord said in a conference call with analysts that the company would not lower its full-year earnings target.

Shares of the Reston, Va.-based company climbed almost 6 percent Thursday, but remained 70 percent behind last summer.
Even though the majority of student loans are highly rated and carry a federal guarantee, investor demand for securities backed by these assets has plummeted - a sign of just how nervous investors are about securities backed by mortgages, student loans and other debt.

Bank of America Corp. said Thursday it would stop private student loans, but continue offering government-backed loans. On Wednesday, Citigroup Inc. said its Student Loan Corp. subsidiary will temporarily stop issuing loans to students at schools where profits have not been satisfactory.

These market conditions come just months after a new law reduced government subsidies for federally guaranteed student loans, whose interest rates are capped at 6.8 percent.

That situation has forced Sallie Mae, formally SLM Corp., to lose money on every federally backed loan it makes, testing Wall Street's patience as around 60 other companies have exited the market for those loans, either permanently or temporarily.

More than 75 percent of federal student loans are issued by those lenders, which primarily raise money by bundling loans into securities sold to institutional investors.

If the appetite for such securities doesn't grow, Sallie Mae could be forced to halt new student loans, said Mark Kantrowitz, an expert on student loans who publishes the Web site finaid.org. "If they have no liquidity, then they can't make new loans," he said.

However, Sallie Mae would still be able to operate, Kantrowitz said, because the company would still receive fees for collecting loan payments. But the company would have to shrink considerably.

Sallie Mae has already been reducing jobs. The company disclosed in its first-quarter earnings report Wednesday night that it had eliminated 1,000 jobs - or 9 percent of the total staff - in recent months.

And Wall Street analysts are wondering how long the situation will last.

"How willing are you to continue making loans that are unprofitable with the uncertainty that's facing us in Washington?" asked Bradley Ball , an analyst with Citigroup in the conference call Thursday morning.

Lord responded, "We feel a special obligation to make sure that this program operates without a serious hiccup," but added that "we are literally in daily deliberations about how much further we can go."

Despite the bad news, Lord said the company would not reduce its full-year earnings forecast of $1.70 to $1.80 per share, excluding one-time charges and the impact of derivatives, though he said earnings are likely to be on the low end of that range.

To bring stability back to the student loan market, Sallie Mae has been pushing for the Treasury Department to aid the stricken market by purchasing securities backed by student loans.

Company executives said such assistance is urgently needed, particularly as students rush to file loan applications early, given concern about the availability of funding. "We don't have weeks or months to resolve the solution," said Jack Remondi, Sallie Mae's chief financial officer.

With large competitors to Sallie Mae scaling back, the government is likely to intervene within the next two weeks to prevent further distress as colleges around the country kick off the financial aid process for next fall, said Matt Snowling, an analyst with Friedman, Billngs, Ramsey & Co.

Asking lenders to operate at a loss for a sustained period "is a pipe dream," he said.

The bipartisan bill approved by the House would let the Education Department temporary authority to buy loans from student lenders to ensure their access to capital and would let the government advance federal money to companies that would operate as "lenders of last resort" if they run out of cash.

Salle Mae shares rose 93 cents, or 5.7 percent, to $17.19. They peaked at of

 

Don't worry about it, the Fed is handing money out to anyone who needs it

 

yaawn ptff no one cares

 

Speak for yourself.

 

Exactly....I have young children....and my sister is already getting hit close to $40k / year sending my nephew to Carnegie Mellon.

 

Interest how a little more than 1yr ago...all was well:



RESTON, Va., Jan. 18, 2007—SLM Corporation (NYSE: SLM), commonly known as Sallie Mae, today reported fourth-quarter and full-year 2006 earnings and performance results that include a total managed student loan portfolio of $142 billion, a 16-percent increase from the year-ago quarter.

“Core earnings” net income was $326 million, or $.74 per diluted share, for the 2006 fourth quarter, compared to $284 million, or $.63 per diluted share, in the year-ago quarter. For the full-year 2006, “core earnings” net income was $1.3 billion, or $2.83 per diluted share, up from $1.1 billion, or $2.51 per diluted share, for 2005.

 

Solution set: The Gov't lets SLM go out of business and schools are forced drastically reduce their prices.

Let the education bubble burst.

 

I think some of you are on to something real here:

This is another bubble that's been quietly building a gigantic head of steam, but hasn't garnered 1/10th the attention of the (now deflating) housing bubble or medical care expense bubble.

Maybe it creates an opening for low cost, but provably credible e-learning institutions (I'm not talking University of Phoenix - no offense intended, UofP grads).

If those degrees can ever be packaged and sold to employers with equivalent respect, won't many of the terra cotta colleges become cemeteries?

Who could possibly have better ability to absolutely destroy university pricing than the electronic campus?

Why would employers of the future be willing to pay a premium in wages for someone that graduated from an earthen campus if the alternative is just as good or better?

 

One aspect to this question of an Education cost bubble that needs to be considered is that a major part of the increased tuition cost in public institutions is due to taxpayer funding that has not kept up with real inflation. Consequently the difference between official and real inflation (which includes energy) has been made up by tuition increases. If you look at tuition in public higher education institutions you will get what i believe is a quite accurate measure of the real inflation rate. This may, in fact, be one of the more accurate measures of real inflation. (You can not use tuition in private institutions in the same way however.)

This raises the question of whether there is really an education cost bubble. To know if there is a bubble we would have to have a measure of real inflation independent of public college tuition. Tuition increases at public institutions of higher learning has averaged between 6 and 7% a year over the past five years. This is likely very, very close to the "real' inflation rate. On the other hand, if you compare this to the increase in real estate prices in the past five years, it is easy to make the case for a bubble in that segment of the economy.

Whether or not a bubble exists would depend on its definition. From my point of view a bubble requires price to increase significantly above the real inflation rate rather than the official rate. Using that definition we have had one in real estate and one in medical costs. The case for an education bubble does not seem quite so clear cut.

 

I want to respond to myself. Having thought this over i think i have overestimated average real inflation over the past five years. It is probably closer to 4 to 5 percent rather than 6 or 7 %. There likely is a small education cost bubble. But it is surely quite small.