JPMorgan Drops Out of Private Student Loan Market
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UPDATED: Sep 13, 2013
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JPMorgan Chase and Co., the largest bank in the United States, is exiting the private student loan industry.
It has scheduled to cease accepting applications on Oct. 12, 2013 and will make its final private student loan disbursements before March 15, 2014.
Experts were divided on what this news means to current and future private student loan borrowers as well as the private college lending industry as a whole.
A Warning Sign and an Exit Sign
Oliver McGee, the former United States Deputy Assistant Secretary of Transportation and Vice President for Research and Compliance at Howard University, said that JPMorgan is just making a wise business decision.
He said that the bank can’t afford another probable domestic-based student loan bubble bursting after the devastating impact the subprime mortgage crisis had on JPMorgan’s balance sheet.
McGee suspects that the student loan bubble is beginning to burst right now and that JPMorgan’s exit is suggesting that the market for private student loans will contract as the bank effectively closes a section of its cash flow.
“Sounds a lot like the subprime loan department shutdowns in the large banking sector that sent similar shock waves onto Main Street back in 2007,” said McGee. “Similar spin machines of sudden subprime loan unit shutdowns occurred much the same way.”
Ever meticulous, McGee recounted that JPMorgan is actually the second major private student loan lender to leave the industry since in 2012 US Bancorp did the same. That leaves only a handful of other household names as the remaining private college loan lenders, namely Wells Fargo, Discover Financial Services, PNC Financial Services Group and Sun Trust Banks.
“Watch for some of these large private banking institutions, now facing growing risks and exposures to student loan defaults, to begin to signal they’re heading for the exit doors of the student loan gaming racket,” said McGee. “This will leave the largest player holding the student loan bubble, the federal government’s Sallie Mae, now privatized since 2004.”
Far from accepting the belief that the recession is over, McGee points to rising costs across housing, food, durable goods and services and other sectors of the economy that show the nation is still in a vice-grip of troubling economic times. Another financial bubble bursting will be far from a positive sign that the nation is “recovering.”
Bank Saves Money, Private Borrowers Lose Money
Jason Lum, a College Consultant with ScholarEdge, believes that JPMorgan’s departure from the private student loan market is going to be nothing but trouble for borrowers. He outlines what is to come on account of such a large financial titan leaving an already small market.
“A basic rule of economics kicks in: rates should go higher and lending terms should be more restrictive for borrowers with fewer players,” he said. “This applies to everything from the airlines, to software developers, and in fact to virtually any product that enters the private market. On the other hand, because federal student loans are so heavily relied upon, I think that JP Morgan’s exiting from the private student loan market will have a fairly negligible effect on the average student loan borrower.”
If Lum is right, then Congress can still influence the situation by making federal student loans more restrictive. Should it do so, he predicts that private lenders will increase their fees and grab more market share.
As bad as private student loans can be for some borrowers, Lum has a strong belief in variety and a market with multiple choices for consumers and thus thinks that JPMorgan’s exit is not something to be welcomed.
“I think what JPMorgan is realizing, as is Congress, is that there is a student loan bubble out there that is poised to explode at any moment,” he said. “Despite laws that make it virtually impossible for borrowers to dispose of student loans in bankruptcy, JPMorgan probably saw the risk involved of this bubble exploding, and concluded that it simply negates all the profitability out of this loan product.”
The Federal Government and Private Lending
Carolyn R. Tatkin, a Partner at the Frutkin Law Firm, said that private student loan lending is actually a small part of JPMorgan’s portfolio and that other lenders will be quick to fill the vacuum left by the large bank.
Their increased market share and any profits that come with it may be short-lived though since Tatkin believes that more and more borrowers will prefer the federal government’s direct lending program.
“While there is always worry when the government takes control of a market, the lower rates and flexible repayment plans have made things slightly easier on student borrowers, in spite of the continuing high cost of education,” she said. “I do not believe student loan borrowers will be impacted significantly by JPMorgan’s exit.”
Even though JPMorgan’s exit has a debatable level of impact on existing and future borrowers, one expert feels that this event was a long-time coming.
Mark Kantrowitz, Senior Vice President and Publisher at Edvisors, believes that JPMorgan’s exit from the private student loan industry was inevitable due to the ending of the Federal Family Education Loan program (FFEL).
He argues that JPMorgan lent both federal and private college loans through the FFEL, but once it ended in July 2010, they were reduced to a narrowed income stream that only came from private lending.
However, students should welcome the bank’s departure since federal student loans have more flexible repayment plans.
“They are also more available and less expensive,” he said. “So borrowers should fare better under federal loans and should always borrow federal first. I doubt there will be any change from the remaining lenders, since the change does not affect demand for private student loans by much.”
Private Lenders Still See Opportunity
Mike Cagney, CEO of SoFi, said that JPMorgan’s departure shouldn’t have much of an impact on private student loan borrowers and that federal student loans are better for undergraduates anyways. He did note that private student loans held an importance in college financing though.
“Private lenders can still add value [by] refinancing graduates, and lending to grad students in school,” he said.
Cagney sees one problem going unaddressed that could be more important that selecting either private or federal college loans: financial education.
“The problem with student loans is that there is no financial literacy to explain to borrowers how much they can borrow and expect to pay back given their career options with their school and degree choice,” he said. “ Schools have no accountability to ensure what they charge for tuition commensurates with the value of that education. Until these two issues are addressed, we can expect tuition to continue to rise well ahead of inflation and debt burdens to grow.”
In contrast to many beliefs, Cagney thinks that private student loan borrowers pay back their debt more than federal student loan borrowers. This is because private lenders conduct thorough underwriting which translates into lower interest rates for certain types of borrowers, such as graduates.
One borrower at SoFi said that private student loans even offer a better deal than federal ones.
“Initially, the federal government was my lender but I was able to get a better rate with a private student loan lender and really liked the community aspect of SoFi,” said Jose Guzman, a SoFi borrower.
Guzman doesn’t think that JPMorgan’s exit from private college loan lending will have much of an impact since the market will only get bigger as higher education becomes more and more of a necessity to survive in society, let alone get ahead.
He predicts more lenders will begin appearing on the scene in order to both offer a desired product and turn a profit from innovation, a key hallmark of SoFi that attracted Guzman in the first place.
“I chose SoFi because they are funded by investors that have a genuine interest in the success of the borrowers,” he said. “It helps that the investors are alumni from the schools as well.”