Another Domino Falls… Are We Closer to the Student Loan Bubble Bursting?

Michael Lux Blog, News, Student Loans 8 Comments

Last week banking giant J.P. Morgan Chase announced they were getting out of the student loan market.  Why would the nations largest lender by assets get out of the student loan market?  According to J.P. Morgan Chase’s executive for auto and student loans, “We just don’t see this as a market that we can significantly grow.”

Even if their market share was stagnating due to increased government involvement in the student loan business, why would they stop lending on loans that are nearly bankruptcy proof?

The only logical explanation here is that they accessed the risk of further student loan lending and figured their money was better spent elsewhere.

Here is where things start to get scary…

Student Loans and Subprime Mortgages

The last time we saw large banks randomly decide to get out of major market segments was just before the recession.

In 2007, HSBC announced they were no longer lending subprime mortgages because, “It’s no longer sustainable and not the right place to allocate capital in the future.”

A Lehman Brothers press release from August 2007 similarly stated that, “market conditions have necessitated a substantial reduction in its resources and capacity in the subprime space.”

At the time lenders were making a fortune on subprime mortgages, and many wondered why they would get out of such a profitable market segment.  Their motives would not become evident until months later when the global recession started.

What other dominoes have fallen?

In 2009 Bank of America left the student loan market.  In 2010, Citigroup decided to exit.

The major banks are not the only institutions to revise their student loan strategy.  Many of you may remember when Sallie Mae restructured their company into two individual entities.  One company now deals exclusively with federal loans, while the other handles their private loans.  At the time I speculated that Sallie Mae was protecting their assets in the event that either the federal or private market crashes.

What does this mean for you?

My initial read on this situation is that this is good news for people with existing student loans.  If the lenders are beginning to fear that they are not going to make money on their student loans, they may be more likely to work out feasible repayment plans and more borrower friendly options.  They may reach a point where they decide that some money is better than no money.

It is also possible that lenders are reading the tea leaves and foresee major changes in the student loan laws on the horizon.  If the law changes and limits their rights to collect the debt, student loans won’t be such a great investment.  J.P. Morgan Chase may have reached the point where they decided it is not a question of if the law will change but when the law will change.  This would be a shocking development given the substantial financial influence that these institutions have over Congress.

This is bad news for people who are currently in college or about to enter college.  Market uncertainty can drive up interest rates and lack of competition can drive up interest rates.  Student loans may be getting more expensive.  Then again, not getting a student loan and going to a cheaper college, may be the best possible outcome for many.

Readers:  What do you think?  Do you read any significance into J.P. Morgan Chase’s decision to get out of student loans?  Do you see this as good news or bad news?