A federal bill intended to bail out student loan lenders like Sallie Mae, one of central Indiana’s top employers, has raced like a bullet through Congress-a remarkable feat for Washington lawmakers.
But what the future holds for embattled student lenders remains murky. While the newly passed measure will increase liquidity by allowing the U.S. Department of Education to buy loans, it leaves responsibility for working out the details to bureaucrats.
In effect, Congress said in the bill that the Department of Treasury and the Education Department should work together to ensure students have access to funding, explained Steve Clinton, president of Indiana Secondary Market for Education Loans Inc., a local not-for-profit that buys student loans from banks.
“So basically they punted,” Clinton said. The credit crunch that set in last year has stalled ISM, which has $1.8 billion of loans on its books but is unable to raise capital to buy more loans.
Virginia-based Sallie Mae, the biggest student lender, lost $104 million in the first quarter and said it is unable to make loans at a profit. The company cut about 200 local jobs in recent months and now employs 2,030 in Fishers and 745 in Muncie. Other players in the once-lucrative student loan industry also are feeling squeezed. Nebraska-based Nelnet late last year eliminated 320 of its roughly 375 Indianapolis workers.
The student loan market soured last year when credit markets seized up, making it difficult for lenders to finance loans. Around the same time, Congress cut the subsidies to lenders on certain federally guaranteed loans. Because of the tough climate, nearly 60 lenders have pulled out in recent months.
Clinton and Sallie Mae officials are hopeful the new legislation leads to a recovery.
Education Secretary Margaret Spellings has “some pretty expansive flexibility and authority to model or put together as comprehensive a plan as she views is necessary,” said Conway Casillas, managing director of public affairs at Sallie Mae. “We were and remain optimistic that that flexibility and ability to structure a comprehensive solution will be something we are supportive of.”
It remains unclear which loans the department will buy and under what terms.
Despite all the uncertainty, student loan companies could have fared far worse, industry analysts say. An earlier version of the bill dictated that the government buy loans at no profit to lenders.
“As such, we view [the final version] as a marginally more positive outcome for lenders,” wrote Morgan Stanley analyst Kenneth Posner in a report.
Shares of Sallie Mae have fallen more than 60 percent since July. Even so, Morgan Stanley thinks the market is overestimating the company’s long-term earnings power.
To adapt to lean times, Sallie Mae is cutting services and increasing fees to students. But company officials have no plans to retreat from their core business. They say sticking it out might yield a financial payoff, since the exodus of lenders has led to pent-up demand.
“Sure, we’re taking a leap of faith that the administration will act so that we can continue,” said Martha Holler, Sallie Mae spokeswoman. “Every time a lender drops out, those remaining see an explosion of applications and they have to decide if they can fund them.”
And that’s the billion-dollar question. Sallie Mae is taking in $3 billion in applications a month, but can fund only $1 billion.
“We’re just now approaching the date that students are beginning to apply for student loans,” Holler said. “The time for a solution is upon us.”