Are the private student loan lenders beginning to abandon ship? It certainly appears that way, thanks to JP Morgan Chase’s recent announcements that they will no longer be offering new student loans as of October 2013. As you read through this article, it’s going to look eerily like 2007 again, just before the sub-prime mortgage crash. It seems as if they have made their money, and want to sneak out the back door before everything collapses as defaulted student loans continue to rise.
This is actually JP Morgan Chase’s second change to their student program in the last two years. Previously, the bank restricted new student loans to existing customers. That change was implemented after President Obama signed into law cutting out the banks as middle men and allowing the federal government to lend directly to students.
Similarities With The Sub-Prime Mortgage Mess
Two weeks ago the bank released through a memo to the U.S.’s colleges that they will no longer accept applications for student loans beginning on the 12th of October 2013. This is the end of the application period for students to apply for this school year. JP Morgan Chase expects to distribute the final monies for existing loans by March 15th 2014. The reason given for dropping an entire division and their piece of a multi-billion dollar loan product seems rather disingenuous if not a direct falsehood. Thasunda Duckett is the Chief Executive for Auto and Student Loans at JP Morgan Chase and she stated in the memo that “We just don’t see this as a market that we can significantly grow”. The private student loan lenders are quietly trying to exit the market in the same fashion the banks exited the sub-prime mortgage mess
Given that student debt is now the largest debt amount in the US at over $1.2 Trillion and still growing, this does not seem like a good business decision. In terms of significant growth, ten years ago student loan debt was just over $240 Billion. That is 500 percent growth in a decade. No other source of debt has grown this much. If JP Morgan Chase can’t significantly grow this market, they probably need to find a new Chief Exec.
What it does seem like is the same way the big lenders started announcing how they were beginning to move out of the sub-prime loan market six years ago. “It’s no longer sustainable and not the right place to allocate capital in the future” was the quote from HSBC Holdings’ Michael Geoghegan when they announced they were shuttering their subprime loan unit. This statement from the Lehman Brothers press release was slightly more descriptive; “… Market conditions have necessitated a substantial reduction in its resources and capacity in the subprime space”.
First U.S Bancorp – Then JP Morgan
The first deserter of this possible student loan sinking ship was U.S. Bancorp. They closed up their student loan division in 2012. Now with JP Morgan Chase departing, this leaves Discover Financial Services, PNC Financial Services Group, Sallie Mae, Sun Trust Banks and Wells Fargo to carry the student loan population along with the nation’s credit unions. It shouldn’t surprise anyone though if at least one of more of these institutions gets out of this particular loan market as well. Even if the student loan bubble doesn’t pop, there is a question that no one seems to be asking. If the big banks get out, where does that leave students who have already reached the limits of their federal loans?
Private loans are still necessary for many students to cover housing costs, food and transportation. If the major, national lenders get out; then the smaller, regional banks and credit unions are going to be expected to try and pick up the students seeking financial support for their educational costs. The problem there of course is that if the big banks don’t see a profit in student loans, smaller lenders may not want to risk it either.
Does this mean the Federal Student Loan Programs will have to expand in size and scope? If private lenders abandon potential future customers, then the answer is yes. Since colleges already have no incentive to lower tuition and fees because of the availability of federal loans, this could mean that other costs will start to rapidly increase as well.
Sallie Mae To Benefit?
It could also mean that Sallie Mae will grow more and more powerful in what may soon become a much smaller loan market. In order to keep up, lenders who remain in the student loan industry may have to buy up or form their own collection agencies and begin to engage in the same collection practices that have gotten Sallie Mae so much bad press in the last few years.
In the end, it is going to be students and their families who will either continue to carry massive debts or make the decision to put off college or simply attend part-time while working to pay for their classes. Student Debt Relief is here to help those families with some very critical decisions and to find the best option for them.
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