Noting turmoil in credit markets, student loan giant Sallie Mae said yesterday that it was suspending its participation in the federal consolidation loan program because it needed to save its resources to make loans to students entering school this fall.
Borrowers still will be able to consolidate their loans, most likely through the federal government's direct loan program.
Sallie Mae's pullback is the latest - and a significant - indicator of how fallout from the subprime mortgage mess is spreading. Dozens of lenders have announced they are leaving or suspending their role in the federal student loan program because of dried-up credit markets. They also blame government cuts in subsidies to lenders last year as a reason they could no longer afford to make loans to students.
Sallie Mae said it is committed to continuing to make federal student loans. And the lender said recently that it secured about $34 billion in lines of credit to make federal and private loans to students and parents.
But in a letter to schools yesterday, Sallie Mae executives said it was losing money on consolidating loans. It also said it would no longer pay the federal Stafford loan origination fee for students after May 2 to reserve the money for new loans.
In the letter, Sallie Mae executives wrote: "Today, the federal student loan marketplace is experiencing unprecedented change and uncertainty. Significant legislative cuts and severe credit market deterioration have caused one-third of the top 100 student loan originators to exit the student loan program. ... As a result, loan demand will significantly exceed lender supply for the upcoming academic year."
The consolidation business ballooned years ago when interest rates fell and students flocked to consolidate their variable-rate loans into single loans with a low fixed rate.
Business started falling off after the federal loan program in 2006 switched from variable-rate to a fixed-rate loans.
Those wanting to consolidate will be able to do so through other lenders or the federal direct loan program, said Robert Shireman, executive director of the Project on Student Debt.
"People who have loans from different lenders are going to want to be able to consolidate somewhere," he said.
Ron Shunk, director of financial aid at Hood College in Frederick, is concerned whether the federal program can smoothly handle a rush of consolidations.
The direct loan program consolidated $19.4 billion in loans in 2006 and could more than double that this year, said Mark Kantrowitz, publisher of FinAid. He called Sallie Mae's exit a "worrisome sign."