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Over the past decade, with default rates looking minuscule, educational lenders scrambled to make private loans. That market grew as much as 25% a year. First Marblehead, which helps banks market and process private loans, went public in late 2003 at $16 a share. Its stock soared to nearly $60 in early 2007.
All that momentum has collapsed. Early this year, First Marblehead raised its average default projection on private loans to 7.68% from 5.81%, citing "a negative consumer-credit cycle." It says it still thinks private loans have an important role to play, but this week it announced it is halving its work force. First Marblehead's stock currently changes hands for little more than $3 a share.
Last month, Bank of America said it was getting out of the educational private loan market. Nelnet, which has only 1% of its portfolio in private loans, said last month that it isn't making any more such loans to hold on its books. Sallie Mae's private-loan losses last year were worse than expected, though it recently said that part of its portfolio has improved.
Students likely to feel the pinch
The private-loan snarls aren't a headache just for bankers. Educational lenders have been warning for some time that their problems are bound to translate into higher borrowing costs for students.It's a matter of simple economics: if fewer lenders are competing for business in a market that's riskier than previously thought, they are sure to charge more for their loans.
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What's more, cautions Sameer Gokhale, an analyst at Keefe Bruyette & Woods, even high interest rates might not attract new sources of capital to the market. That's because student loans don't have to be repaid until graduation or later. Any new entrant in the market would face years of watching its outstanding loans swell before repayments started coming in. Today's tight capital markets don't make that an appealing prospect.
Student-loan executives haven't been getting much sympathy for their plight. The larger mortgage debacle is commanding far more attention these days. But if the educational-lending market shakeout makes it harder for college students to borrow next fall, expect some much tougher looks at what's gone wrong -- and how to fix it.
This article was reported and written by George Anders for The Wall Street Journal.
Published May 21, 2008
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