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Posted: 7:02 PM- Zions Bank is joining other big banks in getting out of the federal program to make government-guaranteed student loans, the consequence of subsidy cuts that have made lending to students unprofitable.
The largest Utah-based bank will stop accepting new loan applications through the Federal Family Education Loans program on Monday and, instead, will substitute new programs Zions is developing that will be in place later this spring, a spokesman said today.
There is money available through other sources, though now there will be fewer of them.
"Given the changes in legislation that have taken place, it really has made it not viable from a financial standpoint to continue accepting applications for government-guaranteed student loans," said Zions' Rob Brough.
In September, Congress enacted the College Cost Reduction and Access Act, which makes college more affordable by cutting loan interest rates in half, increasing Pell Grant awards and creating an income-based loan repayment program.
But the bill also trimmed subsidies to banks. Lenders now receive reduced rates of returns from the government for offering education loans, motivating many big banks to pull out of the FFEL program for the 2008-2009 academic year.
"There were significant changes to the federal loan program, including some fairly dramatic cuts in lender subsidies that make it more difficult for commercial banks to stay in this business," Brough said.
Zions is the latest bank to drop out of FFEL. At least 26 other lenders have suspended their programs since last fall, said Mark Kantrowitz, publisher of FinAir.org, a student financial aid Web site. Another seven lenders offering student loan- consolidation programs also have departed.
"That many lenders leaving is unprecedented. Those lenders who have left represent almost 10 percent of the Stafford and PLUS loan volume and almost 30 percent of the consolidation loan volume," Kantrowitz said.
The Stafford program allows students to borrow up to $23,000 for higher education. PLUS loans are available to students and parents that can cover the full cost of an education. Consolidation programs allow graduates to roll several loans into one. The programs are the main types of federal student loans, Kantrowitz said.
It's unclear how big Zions' share of the Utah student loan market is. Brough didn't have figures.
But according to FinAir.org, Zions wrote $86 million in new education loans in 2006, the latest year for which the Web site has figures, putting the bank at No. 61 among the nation's top 100 lenders.
Zions' departure from the federal program might be a blow to Utah students, but there will still be plenty of money available this fall. Wells Fargo, another big lender in the state, has no plans to exit FFEL. And the Utah Higher Education Assistance Authority, which makes student loans, has financial reserves that should be enough to meet student needs this year, executive director David Feitz said.
"So even if other lenders drop out, we think we've got some staying power that we can ride out these problems and weather the storm, and obviously look to a time when the credit markets rebound," Feitz said.
Kantrowitz said the credit crunch also is driving lenders to suspend student loans. Many banks sell student loans to secondary buyers who finance their investments by borrowing from capital markets. As those funds become harder to tap, secondary borrowers have less money to invest in packages of student loans, making it harder for banks to sell their loan portfolios, he said.