For the first time ever, Student Loan Corp. is suspending lending at schools where it is obtaining “unsatisfactory financial returns.”
Student Loan Corp. (SLC) is based in Stamford and is a subsidiary of New York City-based Citigroup Inc. The company has 60 employees in Stamford and 580 total.
SLC said it is making the change on May 1 due to ongoing turmoil in the capital markets and recent federal legislation, one of several lenders to have been plunged into crisis along with Reston, Va.-based SLM Corp., known as Sallie Mae. And the Education Resources Institute, the largest nonprofit guarantor of private student loans, filed to reorganize under Chapter 11 protection from creditors.
At a U.S. Senate banking committee hearing in mid-April, the publisher of Monster.com Inc. subsidiary FinAid.org said nearly 60 lenders have suspended participation in federal loan programs, and a third of that number have halted private lending. The sector has already been hit with more than 2,500 layoffs, the publisher Mark Kantrowitz estimated.
At the same hearing, Sallie Mae”™s chief financial officer said that because it is now unable to securitize loans, every loan originated in the Federal Family Education Loan Program will be made at a loss. Overseeing the Stafford, Plus, and Federal Consolidation loan programs, FFELP is the largest federal source of student loans.
“The gap between available loans and the demand for them could manifest itself as early as May,” said Jack Remondi, chief financial officer of Sallie Mae. “Lenders who have not already left the business of student lending will be faced with the difficult decision of exiting the student loan business or continuing to make loans at a significant loss.”
SLC did not publish a list of schools that are to be affected by the change, with Citigroup spokesman Mark Rodgers saying its relationships with schools are kept confidential.
In an interview last week, University of Bridgeport President Neil Albert Salonen said Student Loan Corp. provides loans to students at his school, which enjoyed a 22 percent boost in enrollment last fall. Salonen added he would likely not be able to gauge the impact of the decision until July.
“If there are students (affected) who have been here two or three years, we will do something to help them out,” Salonen said. “There will undoubtedly be some impact.”
The National Association of Independent Colleges and Universities (NAICU) recently reported survey results showing a large number of member colleges expected to lose students if something is not done to ensure supplemental funding for students.
“From May until late August the loan process will be in high gear,” said Sarah Flanagan, vice president of policy for NAICU. “Many of our institutions are anxious that the financing markets might worsen between now and September and that in the middle of this peak processing season, their lenders might curtail or stop making student loans.”
In 2007, Congress passed the College Cost Reduction and Access Act (CCRA). Prior to the new law, the federal government reimbursed SLC 99 percent of any loan under default, but the new law reduces the reimbursement rate to 95 percent for loans disbursed as of October 2012.
The law also increases the company”™s reserves for potential loan defaults, cutting into funds it could otherwise invest for profits.
SLC will continue serving existing loans, and indicated it will resume new loans as market conditions improve.
That is unlikely to assuage borrowers who were counting on new loans: Since 2003, SLC has generated $1.3 billion in profits for Citigroup, including a $183 million profit last year on $22 billion in loans outstanding. The company provided administrative services on another $14.5 billion in loans underwritten by other organizations.
