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Credit jitters spread to student loan market

Credit-market tremors — like the ones linked to the housing crisis — are beginning to show up in the $85 billion student-loan market.
/ Source: The Associated Press

Credit-market tremors — like the ones linked to the housing crisis — are beginning to show up in the $85 billion student-loan market.

So far, there is no apparent shortgage of loans available to college-bound Americans. But analysts say rising defaults, coupled with a new law that cuts federal subsidies to student lenders, are beginning to strain the industry.

The rising defaults have surfaced amid falling home prices and rising foreclosures, trends that last summer touched off a crisis in global credit markets as investors faced the prospect of not being repaid on mortgage-backed securities.

In some cases, families whose home loans are resetting at dramatically higher rates may be having a harder time keeping current on payments on student loans or auto loans — which recently have been posting their highest default rates in several years. A general tightening of credit is also likely making it more difficult to borrow from other sources to meet these payments, analysts said, and soaring oil prices are eating into budgets.

Student lenders are under increasing pressure, too. Following a crackdown by New York Attorney General Andrew Cuomo, they have been forced to alter the way they do business. For example, they are no longer allowed to offer gifts or share revenue with college financial-aid officers.

It is against this backdrop that on Friday First Marblehead Corp's CEO cited "challenging times" as the company slashed its quarterly dividend to 12 cents a share from 27.5 cents a share, and said it would not bundle any more student loans for investors during the fourth quarter. As this activity shrinks, less money will be pumped into the private student-loan market, which makes up 20 percent of the overall student loan market.

Meantime, reduced federal subsidies and anticipated lower profits have led a number of banks and other student lenders to scale back discounts to borrowers, such as reduced interest rates for having payments automatically debited from bank accounts.

The company most affected by the reduced subsidies is Sallie Mae, the nation's biggest student lender. The company, formally called SLM Corp., saw its $25 billion acquisition by a private-equity firm and two banks — Bank of America Corp. and JPMorgan Chase & Co. — scuttled and thrown into court. The investors argued the change would cut deeply into the lender's profits.

Barmak Nassirian, associate executive director of the American Association of Collegiate Registrars and Admissions Officers, said he sees "no evidence of any kind of looming crisis of access to capital" for students.

But some critics of the student-loan industry have said the sort of meltdown that racked the mortgage market could happen with student loans, especially the more expensive private loans. And many experts have predicted sharp increases in student-loan defaults in years to come.

Reston, Va.-based Sallie Mae reported that it wrote off $142.6 million for borrowers missing payments on student loans in the July-September quarter, more than doubling the $67.2 million writedown of a year earlier.

Demand for securitized student loans has helped fuel the boom in lending to students. The market for securitized private student loans alone jumped 76 percent in 2006, to $16.6 billion, from $9.4 billion in 2005, according to Wall Street rating agency Moody's Investors Service.

The rising student loan delinquencies aren't surprising, said Ken Mayland, president of ClearView Economics LLC in Cleveland. "In an economic slowdown that's what you expect," he said.

First Marblehead's announcement of its pullback came three days after Moody's said it might downgrade 16 securities issues put together by the company because of rising default rates on the underlying student loans.

That hammered First Marblehead's stock price, which finished trading Monday at $17.75, down around 40 percent from the start of last week.

In a sign that the troubles could spread beyond Sallie Mae and First Marblehead, Moody's said last week it was considering a ratings downgrade for Education Resources Institute Inc., known as TERI, which guarantees nearly all the student loans bundled into securities by First Marblehead.

Shares of Sallie Mae ended trading Monday at $34.90, down $1.22; they have declined by 9.5 percent over the last four weeks. Another student lender, Nelnet Inc., finished at $14.11, up 27 cents; they've lost 10.7 percent over the four weeks. Student Loan Corp. ended at $145.71, up $4.42; they're down 4.5 percent over the period.