Bank of America to Direct Student Loans to Federal Program

Bank of America to Direct Student Loans to Federal Program

By ROBERT TOMSHO AND COREY BOLES
April 18, 2008; Page C2

Bank of America Corp., one of the nation's largest student lenders, said it will stop making private student loans and will prepare to do more lending under a federally guaranteed program. The announcement came as the U.S. House of Representatives passed legislation that would strengthen protections for the government loan program.
The move by Bank of America, based in Charlotte, N.C., heightens concerns that some students will have difficulty landing private loans to help pay for college this fall. But it provides a lift for the Federal Family Education Loan, or FFEL, program, which accounts for about four out of five college loans.
In recent months, more than 50 lenders have announced they will stop making FFEL loans, saying they are no longer profitable because of subsidy cuts and the difficulty of raising lending capital with securities backed by such loans. Earlier this week, SLM Corp., known as Sallie Mae, the largest student lender , reported a first-quarter loss and warned that it couldn't make profitable loans at this time.
Bank of America, the third-largest lender in the FFEL program, said federally guaranteed loans accounted for about 75% of the $4.4 billion in student loans it made last year.
Sandra Dunleavy, head of the bank's student loan business, said it "remains committed to helping parents and students" through FFEL, which provided 7.5 million students and parents with $91.8 billion in federally guaranteed loans in the current school year, according to government estimates.
Bank of America's withdrawal from private student lending was a blow to Boston-based First Marblehead Corp., which acquired private loans from Bank of America and other lenders, then bundled them into trusts that issued notes to investors. Fees from Bank of America accounted for 15% of First Marblehead's revenue in fiscal 2007.
First Marblehead said Thursday that the bank terminated its agreements with the company because of the recent bankruptcy filing of Education Resources Inc., which insured loans against default for First Marblehead. First Marblehead's shares fell 17%, or 68 cents, to $3.37 in 4 p.m. composite trading on the New York Stock Exchange.
Meanwhile, the House took action Thursday to provide a backstop to the FFEL program. Rep. George Miller (D., Calif.) co-sponsored the Ensuring Continued Access to Student Loans Act with the education panel's ranking Republican, Rep. Howard McKeon, also of California.
Approved by a strong bipartisan majority of 382-27, the bill lays out emergency measures that could be implemented if there's evidence the student-loan market is seizing up.
It clarifies that the federal government has the ability to designate, and even provide capital to lenders as a last resort if students are unable to get loans otherwise. It would provide for up to 35 government-sponsored guaranty agencies to begin lending to students as an interim measure. Under existing law, the government has this authority, but it has never been invoked.
Under the legislation, the Secretary of Education could purchase student loans from private lenders on an interim basis to provide emergency liquidity to markets.
The White House indicated on Wednesday that it supported key provisions of the bill and was willing to work with Congress to craft a law that both branches of government could get behind. Sen. Edward Kennedy (D., Mass.) has introduced legislation in the Senate similar to that approved by the House.
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