Bank of America Corp. yesterday said it would no longer offer private student loans, adding to the cascade of lenders pulling back in various parts of the college loan market.
The bank, the third-largest student lender in the country, extended $900 million in private student loans last year. Bank of America said it would continue to offer loans that are guaranteed by the federal government, which make up 85 percent of its $6 billion student lending business.
Sandra Dunleavy, head of Bank of America's student loan business, said in a statement that the bank "remains committed to helping parents and students finance a college education through the federal student loan program," including Stafford and Plus loans. But bank executives declined to discuss the move further.
Bank of America's decision came 10 days after the company it relies on to stand behind its private loans - The Education Resources Institute Inc., or Teri - filed for bankruptcy protection. The way Bank of America and many other large banks have handled private student loans was to get a Teri guarantee and package the loans as securities, through Boston-based First Marblehead Corp., and sell them to investors. That cleared the way for new bank funds to be available for student loans.
Teri is reorganizing and aims to continue its business, but its troubles have further spooked a student loan market that began having problems last fall. The market for selling securitized student loans evaporated last October in the wake of the subprime mortgage crisis that hurt most credit markets. Even assuming the securitization market comes back eventu ally, those loans can't be turned into attractive investments without a guarantee from the likes of Teri to take over any loans that go bad.
If Bank of America and others can't sell student loans, they'd have to hold them on their own books. That's a risk most don't want to take long-term, bank executives and experts in student loans said.
Bernard Pekala, director of student financial strategies at Boston College, said it was "unnerving" that so large a bank would decide not to pursue a sector of student loans.
"It's a concern that someone has made a decision not to be in the market, and hopefully it's not a trend," Pekala said.
But since December, some 50 firms have stopped writing certain federally backed or private student loans. This week, Citigroup Inc. said it would stop making loans to schools where the loans are small or unprofitable. It also said it would no longer offer federal consolidation loans, which allow students and families to package loans into a more manageable single payment.
Eight of the 10 largest consolidators have quit the business this year, including SLM Corp., or Sallie Mae, the largest federal student lender.
Mark Kantrowitz, publisher of FinAid.org, a website on student loans, said, "At this point, it's not profitable to do consolidation loans. Those loans are completely underwater."
Senator Edward M. Kennedy, Democrat of Massachusetts, yesterday sent letters to the presidents of nearly 100 Massachusetts colleges and universities, urging them to enroll in a direct-loan program, which lets the schools extend federally backed loans directly to students.
Meanwhile, the US House of Representatives approved a measure to allow the Department of Education to buy federally guaranteed loans that lenders can't sell to private investors.
Profitability is at the core of the pullback in student loans that could cause a credit crunch for students and families.
For lenders other than banks, which must raise capital to make loans, it's costing more to raise those funds. If the difference between the cost of that capital and how much they can charge for loans - federal student loan rates are capped at 6.8 percent and 8.5 percent, depending on the type - is too small, many are bowing out of the business.
A large local player in student loans, the Massachusetts Educational Financing Authority, this week said it would stop making federal student loans for just that reason. MEFA is looking to raise capital through bonds to continue to make private loans, because it can charge more for private loans. More than 14,700 Massachusetts students took advantage of MEFA's federally backed loans in the current school year.
Beth Healy can be reached at firstname.lastname@example.org.