More Private Lenders Will Dump Student Loan Portfolios: Fitch Ratings


NEW YORK (MainStreet) — Banks and other investors with private student loans can be expected to sell off these assets as their value declines and more attractive alternatives surface, according to an analysis by Fitch Ratings released earlier this week.

Fitch, a New York and London-based debt rating agency, noted that Wells Fargo has moved its $9.7 billion FFELP loan portfolio into the held-for-sale category, an accounting move that anticipates the sale or disposal of long lived assets. NelNet, the National Education Loan Network based in Lincoln, Nebraska, bought $3.6 billion in FFELP loans from CIT Group in April.

FFELP, the Federal Family Education Loan Program, was ended by the 2010 Health Care and Education Reconciliation Act or HCERA—which also ended the federal government's role as guarantor of federal loans made by private lenders. Since 2010, new federal student loans have been made through the Department of Education's Direct Student Loan program.

"We believe the announcement from Wells Fargo combined with CIT's portfolio sale last April may signal that banks are more willing to sell these assets," Brendan Sheehy, director of financial institutions at Fitch. He also noted that "banks tend to view these portfolios as non-core, non-strategic assets given that they are in runoff" as a result 2010 Health Care and Education Reconciliation Act.

Sheehy also noted that "new capital requirements have prompted banks to take a second look at how they allocate capital across their business lines. FFELP loans are low-yielding assets. With loan demand improving in other high-yielding asset classes, we believe banks may decide that they could more efficiently manage their capital by selling their FFELP portfolios and reallocating the capital toward other businesses."

Other lenders with big FFELP portfolios include the Brazos Group, PNC, Access Group, SunTrust, Bank of America, Northstar Guarantee, US Bank and JP Morgan Chase, which announced its exit as an originator of student loans last year.

Mark Kantrowitz, author of Filing the FAFSA and publisher of, described the FFELP portfolios as being in a wind-down situation.

"Most borrowers who default do so within the first four to five years of entering repayment," he said. "So the portfolios have shifted from being an unproven asset to a proven asset, with all the defaulting borrowers removed from the portfolio due to the federal government payment of guarantee claims," up until the 2010 HCERA.

"The annual interest payments decrease as the borrowers pay down the principal balance," Kantrowitz said. "One does not want to wait until the portfolio is too old to sell it, as the number of borrowers remains relatively unchanged until the loans are closer to maturity and servicing costs are proportional to the number of borrowers, not the dollars. Lenders who are no longer involved in making new (private) student loans may wish to exit the business by selling off their portfolios.

Securitizing these loans in the post-2008 world is no longer a viable option. Kantrowitz said, "Lenders have been unable to sell their portfolios through securitization, since the capital markets are still frozen, but there are some FFELP participants who will be interested in growing their portfolios due to the economy of scale in loan servicing. Navient is one of these."

Navient was created when private student loan originator and servicer Sallie Mae split itself into two separate companies earlier this year. Sallie Mae will continue to provide consumer banking services, one of its existing businesses. By the fall, Navient is expected to service the bulk of Sallie Mae's student loans while taking over Sallie Mae's contract with the Department of Education to manage payments of federal student loans.

- Written by John Sandman for MainStreet

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