Student Loan Overhaul Approved – Analyst Blog

Last week, both the House and the Senate passed a bill to overhaul the student loan program, ending the Federal Family Education Loan Program (FFELP) that provided federal subsidies to private lenders.

 

As a result of this, federally guaranteed student loans would be originated under the Direct Loan Program run by the U.S. Department of Education. It would eliminate the role of private lenders such as SLM Corp. (SLM), aka Sallie Mae, and Nelnet Inc. (NNI) in originating federal student loans under FFELP effective July 1, 2010.

 

However, both Sallie Mae and Nelnet are expected to play a major role as participants in the Department of Education’s servicing contract, under which they will service and collect government guaranteed loans.

 

Though this would allow some of the private lenders to remain in the market as loan servicers, their business would shrink from the previous loan originations. The lenders have strongly opposed the changes and warned of significant job cuts.

 

According to the Congressional Budget office, this move to end private origination of student loans would save over $60 billion of taxpayers’ money over the next 10 years. These savings would be used for increasing low-income students’ grants and minority students’ funding.

 

FFELP, the second largest of the U.S. higher education loan programs, was initiated by the Higher Education Act of 1965. In 2007−08, FFELP served 6.5 million students and parents, lending a total of $54.7 billion in new loans (or 80% of all new federal student loans).

 

However, in Februry 2009, the U.S. President introduced a fiscal year 2010 Federal budget proposal calling for the elimination of FFELP and a recommendation that all new student loan originations be funded through the Direct Loan Program.

 

In September 2009, the House of Representatives passed the Student Aid and Fiscal Responsibility Act (SAFRA), which would eliminate the FFELP and require that, effective July 1, 2010, all new federal student loans be made through the Direct Loan Program.

 

Following this, the Health Care and Education Reconciliation Act of 2010 was passed late last week. It would now go to President Barack Obama for his signature. The bill included the SAFRA, which was attached as a rider. This was done to avoid obstruction by Republicans and required only a simple majority to pass.

 

Going forward, we believe that Sallie Mae’s leading position in the student lending market and its sturdy cost structure provide it an edge over its peers. For Nelnet, we think that its diversified business model, increasing revenues from fee-based business and servicing of loans for the Department of Education coupled with cost containment initiatives augur well.

 

Shares of Sallie Mae were up 53 cents or 4.4% to $12.58 while shares of Nelnet were up 9 cents or 0.49% to $18.48 during Friday’s regular session.