Student lending is big business. The total amount of student debt outstanding is more than $1 trillion — greater than the total amount of credit card debt outstanding – and growing every year. The Chronicle of Higher Education calculates that nearly 20 million Americans attend college each year and that 60 percent of these students borrow annually to help cover costs. As it stands, there are nearly 37 million people with outstanding student loans holding an average balance of $24,301.
But just because it’s big business doesn’t necessarily mean it’s profitable business. At the end of the day, lenders make money by charging interest, and typically, interest rates on loans are a function of two things: benchmark lending rates and risk. Financial institutions will lend out money to borrowers whichever way suits their appetite. In general, this gives them discretion over what interest rates to charge people based on the risk of lending to them.
However, this is not really the case with student loans, and the primary reason is because in the wake of the late-2000s financial crisis, the government has come to dominate the student lending business.
More than 90 percent of student loans made in the 2011-2012 school year were made by the government. This reality is the product of an economic and political alchemy: Lending conditions in the post-crisis period seized up, and banks became unwilling to lend to students who were highly likely to make late payments, default, or otherwise be an unfavorable borrower. The government, on the other hand, opened its arms, and would loan to anybody who had received an acceptance letter.
With such heavy involvement in the student lending business, the government has pretty much become the only game in town. Private-sector profits made from student loans have declined by nearly 70 percent in the wake of the financial crisis, to just $8.1 billion — pocket change for the major financial institutions that had once been in the industry, such as Citigroup (NYSE:C), U.S. Bancorp (NYSE:USB), and Bank of America (NYSE:BAC). Each of these banks has exited their student lending business over the past four years.
And now, JPMorgan Chase (NYSE:JPM), America’s largest bank by assets, is joining them. A memo seen by Reuters reveals that due to the lack of room to grow in the area and competition from the government, JPMorgan will exit its student lending business, effective October. Reports indicate that the bank’s student loan portfolio at the end of the first half of the year was about $11 billion, which stacks up against nearly $2.5 trillion in total assets.
In August, President Obama signed a bill to lower the interest rate on both subsidized and unsubsidized student loans. The new student loan rates have been fixed to 10-year Treasury note plus a premium to “offset costs associated with defaults, collections, deferments, forgiveness, and delinquency,” according to the bill. These rates are retroactive to loans made since July 1, when the previous rates doubled.
|Rate (+percentage point)||Cap (percent)|
|Undergrad||10-year + 2.05||8.25|
|Graduate||10-year + 3.6||9.5|
|PLUS Loan||10-year + 4.6||10.5|
“This is a win-win for both students and taxpayers,” Sen. Tom Coburn (R-Okla.) said in a press release supporting the bill in July. “Tying interest rates to the market allows students to take advantage of historically low rates while ensuring taxpayers will not have to foot the bill for arbitrary rates set by Congress. … The Congressional Budget Office has determined this legislation would save taxpayers $715 million over ten years.”
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