Here’s how the government forced Wall Street out of student lending, and here’s who took it over

West Point Graduation
Newly commissioned second lieutenants participate in the traditional hat toss at the end of the 2014 commencement ceremony at the U.S. Military Academy, West Point, N.Y., May 28, 2014. Sgt. 1st Class Christopher Fincham/US Army

There is a new group of firms looking to profit from Americans’ desire for college degrees.

It includes: Discover Bank, Navient, PNC Bank, RBS Citizens, Sallie Mae and Wells Fargo. Wells is the lone big bank still making private student loans.

The biggest banks on Wall Street are mostly quitting student lending — which leaves potentially hundreds of millions in service fees up for grabs over time, as long as the new investors can stomach the possibility of borrowers’ default.

Despite calls for Washington DC regulators to ‘forgive’ student loans, there has been no action toward this, and no guarantee private loans would be covered by any legislation to pare down student debt. But, already, US Bancorp, JP Morgan and Bank of America have withdrawn from student lending.

But how did all that start?

Big banks’ split from student lending is in part due to the wind-down of The Federal Family Education Loan Program (FFELP) in 2010.

That’s when President Barack Obama signed off on the Student Aid and Fiscal Responsibility Act (SAFRA), which ended the subsidies banks were provided under the old program.

The ‘Big Six’ — Discover Bank, Navient, PNC Bank, RBS Citizens, Sallie Mae and Wells Fargo — however, decided to continue providing student loans.

Take a look at the graphic below, which comes from research firm MeasureOne. Even though federal student debt dwarfs private loans, the creation and growth of an asset class worth more than $US90 billion is lucrative. And thanks to a rise in annual private loan volume, according to student lending industry sources, the smaller bubble is very likely to grow over the near-term.

Comparative student lending bubbles
Right now, private student lenders aren’t loaning nearly as much out as the federal government. But this gap should begin to shrink soon. MeasureOne

Two factors make it lucrative for the private student lending industry’s ‘Big Six’ to stay in the game, even though big Wall Street banks gave up.

Right now, no student loans can’t be discharged through personal bankruptcy. This means that students are stuck with their debt, no matter what: it’s kind of like a tattoo, just more permanent.

Second, it is more difficult to modify a private loan through options like deferment, than it is for a federal student loan. This will keep students paying the same loan terms, consistently.

This will likely keep students more eager to pay back their private loans first. It also means that, for the Big Six, they will have a good opportunity to make money as long as the Federal Reserve keeps rates low and there’s no progress on policy in Washington.

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