Banks are bailing on the student loan business and it couldn’t come at worse time

Some of the world’s biggest banks, including JP Morgan, Bank of America and US Bancorp, are withdrawing from the student loan market.

It couldn’t come at a worse time.

That is because it coincides with a rise in students who want student loans.

And, the amount of money those students want to borrow is also going up because the price of of a college education keeps rising.

This chart tells the story:

Borrowers & average balance per borrower
April 2014 NY Federal Reserve report shows borrowers, and their average balance, has continued to rise. Federal Reserve Bank of New York — Staff Reports

Why are the banks pulling back on student loans?

Right now the Federal Reserve is keeping interest rates low.

That means it’s cheap to borrow money, and so the number of student loans is ballooning. Student loans recently crossed the $US1.3 trillion mark.

It also means that student loans are less profitable for banks to make.

And, on top of that, students are having harder time paying them back. Defaults are on the rise, and borrowers are falling behind on payments more quickly, according to Fed data.

This chart tells that story:

Default rates by loan year cohort
More students are defaulting even earlier on student loans. Federal Reserve Bank of New York — staff reports

As banks pull back on making student loans, private equity firms are stepping into their place.

Apollo Global Management announced Tuesday plans to back LendKey Technologies Inc., through its lender MidCap Financial, with $US1 billion to buy student consolidation loans originated through LendKey.

Private equity has less to lend than the big banks. For students, this means that they may have to get their loans from many different places. That’s a pain in the rear. It’s also an opportunity for new companies that are able to coordinate and/or consolidate loans.

“Ten years ago, there was a relatively straightforward system of repayment and much lower lifetime balances,” said Peter Wylie, co-founder at Gradible, a platform that aims to help borrowers navigate repayments to student loan creditors. “The environment today is undoubtedly more complex than it was 10 years ago.”

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