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Student Loan Corporation (STU) |
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WIKI ANALYSIS
Student Loan Corporation (STU) originates and securitizes student loans. The company's primary source of revenue is net interest income, generated by the spread between interest rates earned on its loans to students and interest rates paid on the money it borrows from others to fund these loans.[1] Most of its loans (78% as of December 31, 2007) are originated through the Department of Education's (DOE) Federal Family Education Loan (FFEL) Program.[2] Loans originated through the FFEL Program are federally insured against default, and their interest rates are capped by the government.
The company also makes private loans, which are known as CitiAssist loans and typically carry higher interest rates than federally guaranteed loans.[3] As a partially-owned subsidiary of Citigroup, Student Loan Corporation makes both its private and federal loans using Citi's branding and borrows all of its funds from the company. Citi is also the exclusive counterparty on all of the interest rate swaps STU uses to reduce its exposure to interest rate risk.[4]
The student loan industry is heavily regulated, and federal legislation, such as the College Cost Reduction and Access (CCRA) Act of 2007 and continued amendment of the Higher Education Act of 1965, determines, among other factors, the rate of return the company receives on its FFEL program loans and the rate at which it is reimbursed for nonpayment of federally guaranteed loans, both of which substantially impact STU's net interest income and provision for loan losses.[5]. Changes in interest rates and the market for securitized loans also affect the company's earnings since the federally guaranteed rate of return on FFEL program loans is tied to the 90-day Treasury Bill rate and gains from the sale of securitized loans account for a sizable portion of STU's total revenue (29% in 2007).[6][7]
Business and Financials
The company's portfolio is composed of both FFEL Program loans and private education loans.
FFEL Program Loans
- Subsidized Federal Stafford Loan, for students meeting financial need criteria set by the federal government.
- Unsubsidized Federal Stafford Loan, for students/families whose income and assets exceeds the level of eligibility for subsidized Stafford loans.
- Federal PLUS Loan, for parents of dependent students and graduate and professional students.
- Federal Consolidation Loan, for students seeking to combine multiple federal loans into a single guaranteed loan.[8]
Essentially all FFEL program loans generate a rate of return guaranteed by the federal government. The government makes payments, known as special allowance payments (SAPs) to the lending company (STU) if the interest rate on the loans falls below the minimum rate of return for the lender set in the Higher Education Act. That minimum rate is expressed as a premium over the 90-day Treasury Bill rate and was set by the CCRA Act of 2007 at 1.19% for Stafford loans not in repayment (loans deferred while the student is in school and the government is paying the student's interest), 1.79% for Stafford loans in repayment and PLUS loans, and 2.09% for consolidation loans.[9] These guaranteed rates apply to FFEL program loans made on or after October 1, 2007. FFEL program loans made prior to October 1, 2007 are generally guaranteed higher minimum rates of return, and STU expects the average rate of return on its student loan portfolio (which was 7.9% as of December 31, 2007) to decline as older loans are repaid and new loans with lower guaranteed rates of return are added to the portfolio.[10]
Although the company's portfolio also includes Federal Supplemental Loans for Students (SLS loans) and Health Education Assistance Loans (HEAL loans) that it had purchased or made in previous years, STU is no longer making new loans through these programs.[11]
Private education loans are made through the proprietary CitiAssist program and are intended for students who do not qualify for federal loans or require additional assistance beyond that provided by federal programs.[12] Approximately 82% of the company's private student loans are covered by private insurance and a portion of its uninsured loans are covered by risk-sharing agreements negotiated with individual colleges.[13]
Student Corporation Loans Held by Program Type (in millions of USD)[14]
| December 31, 2007 | December 31, 2006 | |
|---|---|---|
| Federal Stafford Loans | 8,687,483 | 7,192,550 |
| Federal Consolidation Loans | 6,364,762 | 9,118,615 |
| Federal PLUS/SLS/HEAL Loans | 1,192,028 | 872,968 |
| Private Education Loans | 4,696,337 | 3,072,394 |
| Total Student Loans Held | 21,608,692 | 20,889,399 |
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Revenue, Operating Expenses & Net Income (in millions of USD)[15]
| 2007 | 2006 | 2005 | 2004 | 2003 | |
|---|---|---|---|---|---|
| Net Interest Income | 389 | 412 | 493 | 561 | 455 |
| Gains on Loans Sold & Securitized | 112 | 216 | 153 | 23 | - |
| Total Operating Expenses | 180 | 166 | 149 | 132 | 114 |
| Net Income | 183 | 287 | 309 | 285 | 212 |
Net Interest Margin
(Annual Net Interest Income / Average Interest Bearing Assets for the Period)[16][17]
| 2007 | 2006 | 2005 | 2004 | 2003 | |
|---|---|---|---|---|---|
| Student Loan Corporation | 1.66% | 1.61% | 1.87% | 2.28% | 2.04% |
| Sallie Mae | 1.26% | 1.54% | 1.77% | 1.92% | 2.53% |
Trends & Forces
The College Cost Reduction and Access Act (CCRA Act) of 2007 Cut Federal Student Loan Interest Rates & Reimbursement Rates on Loan Losses
The CCRA Act, which went into effect in the fourth quarter of 2007:
- Cut the reimbursement rate paid by the federal government on losses stemming from default on federally insured student loans for claims filed on or after October 1,2007. The reimbursement rate will decline further to 95% for loans made on or after October 1, 2012.
- Reduced guaranteed minimum rates of return for lenders on FFEL program loans.
- Called for the creation of an income-based repayment plan starting July 1, 2009 for most FFEL Program borrowers, capping the monthly repayment rate based on the borrower's income and forgiving debt remaining after 25 years of repayment.
- Required the DOE to institute a pilot program for an auction of eligible PLUS loans made to parents beginning on July 1, 2009.[18]
The provisions of the CCRA Act will reduce STU's net interest margin, increase the amount of money it sets aside to cover loan losses, and decrease its gains from the sale of securitized loans. [19][20][21]
On February 7, 2008, The College Opportunity and Affordability Act was passed in the House of Representatives.[22] The act seeks disclosure of preferred lender agreements private lenders make with schools and requires colleges with preferred lender programs to also offer loans from at least 3 unaffilliated lenders.[23] This will increase the amount of competition STU faces in making new loans as university financial aid offices will be required to present their students with loan offers from a wider range of private companies.
The Subprime Crisis Has Hit Student Lenders like STU
Auction Rate Securities are securities in which the interest rate the issuer pays to holders of the securities is set by auctions held at regular intervals, typically every 7 or 28 days. At these auctions, holders wishing to sell their securities can do so and new buyers state the interest rate they demand in order to purchase the securities. This allows issuers to pay lower, short-term inrest rates on its long-term debt. However, when there are few or no buyers in the market, the interest rate on the securities (which the issuer of the securities pays out to holders) jumps, significantly increasing the company's cost of funds. This is what happened in February 2008, when fears about the securities' credit ratings caused several auctions to fail.[24]
Weak demand and resulting illiquidity in the $80 billion market for auction rate securities backed by student loans caused 46 lenders, including Washington Mutual and College Loan Corp, to stop making federally guaranteed student loans in April 2008.[25] Illiquidity concerns prompted STU to postpone loan securitizations in the 3rd and 4th quarter of 2007, and adverse market conditions are expected to reduce the gains from sales of securitized loans in 2008[26]. On April 16, 2008, the company announced that, effective May 1, 2008, it would stop making loans at certain schools where low loan balances and interest rates 'result in unsatisfactory financial returns' and would exit the federal loan consolidation business.[27]
STU Decides Not to Insure New Private Loans, Increases Exposure to Default Risk
As of January 1, 2008, STU no longer purchases insurance for new CitiAssist loans, reasoning the resulting increase in credit losses will be outweighed by the reduced expenditure on insurance premiums.[28] The decision caused the company to increase its allowance for credit losses on private education loans to $29.8 million as of December 31, 2007, compared to $7.3 million at the end of 2006.[29]
On December 31, 2007, 2.8% of STU's private education loans were deliquent 30-89 days, up from 2.6% at the end of 2006. However, the rate of private education loans delinquent 90 days or more fell to 1.2% at the end of 2007, down from 2.6% a year earlier.[30]
Top Colleges Make Changes to Financial Aid Policies, Move Away from Student Loans
Following a Senate inquiry into endowment spending in early 2008, several elite universities, including Harvard, MIT, Stanford, and Yale, expanded their financial aid policies to offer reduced tuition, more grants and fewer loans to students from lower and middle-class families.[31] As an example, students at Stanford from families with incomes less than $100,000 no longer pay tuition and those from families with incomes less than $60,000 do not pay tuition or room and board.[32] Dozens of colleges have made similar changes to maintain competitive in attracting the best students. The de-emphasizing of loans as part of colleges' financial aid packages and increased endowment spending on grants means fewer students will take out student loans and those that do will not borrow as much as they did before the financial aid reforms were made. This will negatively impact STU's revenue by decreasing net interest income as well as gains from the sale of securitized loans.
Competition
STU competes with Sallie Mae (SLM), J P Morgan Chase (JPM), Bank of America (BAC), and Wells Fargo (WFC) in originating (making) new private and FFEL Program loans. STU's top competitors in the consolidation business, in which a lender combines all of a borrower's federal student loans from various programs into a single, federally guaranteed loan, include Sallie Mae (SLM), Nelnet (NNI), J P Morgan Chase (JPM), and Student Loan Xpress.[33] Private lenders like Student Loan Corp. also compete with the Federal Direct Lending Program (FDLP), in which the federal government lends directly to students. ]][34]
Top 10 Originators of FFEL Program Loans in Fiscal Years 2007 and 2006[35]
| Loans Originated FY07 (in millions of USD) | Loans Originated FY06 (in millions of USD) | FY07 Ranking | FY06 Ranking | |
|---|---|---|---|---|
| Sallie Mae (SLM) | 9002.3 | 6961.7 | 1 | 1 |
| Citibank / Student Loan Corporation | 4764.3 | 3871.3 | 2 | 2 |
| Bank of America (BAC) | 3261.6 | 2897.4 | 3 | 3 |
| J P Morgan Chase (JPM) | 3064.7 | 1574.7 | 4 | 7 |
| Wells Fargo (WFC) | 2954.8 | 2643.6 | 5 | 4 |
| Wachovia (WB) | 2934.5 | 2537.9 | 6 | 5 |
| College Loan Corp | 1493.3 | 1414.9 | 7 | 8 |
| U.S. Bancorp (USB) | 1332.5 | 1159.2 | 8 | 9 |
| Edamerica | 1303.7 | 1087.0 | 9 | 10 |
| Access Group | 1124.9 | 935.7 | 10 | 11 |
Top 10 Consolidators of Federal Loans (Includes Consolidation of FFEL & FDLP Loans) in Fiscal Years 2007 and 2006[36]
| Loans Consolidated FY07 (in millions of USD) | Loans Consolidated FY06 (in millions of USD) | FY07 Ranking | FY06 Ranking | |
|---|---|---|---|---|
| Sallie Mae (SLM) | 12,554.3 | 19,996.6 | 1 | 1 |
| Nelnet (NNI) | 4529.0 | 4869.8 | 2 | 2 |
| Next Student | 3020.7 | 3301.4 | 3 | 4 |
| Affinity Direct | 2107.5 | 1008.8 | 4 | 19 |
| J P Morgan Chase (JPM) | 1825.1 | 1004.9 | 5 | 20 |
| Student Loan Xpress | 1730.8 | 1887.3 | 6 | 8 |
| Citibank / Student Loan Corporation | 1585.6 | 4775.8 | 7 | 3 |
| Wells Fargo (WFC) | 1427.9 | 1193.3 | 8 | 18 |
| College Loan Corp | 1268.5 | 2217.0 | 9 | 6 |
| Pennsylvania Higher Education Assistance Authority (PHEAA) | 1258.3 | 2062.8 | 10 | 7 |
References
- ↑ STU 2007 10K Business Overview Pg 2
- ↑ STU 2007 10K Summary of Loans by Program Type Pg 49
- ↑ STU 2007 10K Student Loans Pg 48
- ↑ STU 2007 10K Interest Rate Derivate Agreements Pg 57
- ↑ STU 2007 10K Regulatory Impacts Pg 16
- ↑ STU 2007 10K Risk Factors Pg 27,30
- ↑ STU 2007 10K Statements of Income Data Pg 1
- ↑ STU 2007 10K Student Loans pg 21
- ↑ STU 2007 10K Regulatory Impacts Pg 16
- ↑ STU 2007 10K Regulatory Impacts Pg 16
- ↑ STU 2007 10K Student Loans Pg 48
- ↑ STU 2007 10K Student Loans Pg 21
- ↑ STU 2007 10K Credit Risk Pg 18
- ↑ STU 2007 10K Summary of Loans by Program Type Pg 49
- ↑ STU 2007 10K Statements of Income Data Pg 1
- ↑ STU 2007 10K Earnings Data Pg 1
- ↑ SLM 2007 10K Item 6 Pg 36
- ↑ STU 2007 10K Regulatory Impacts Pg 16
- ↑ STU 2007 10K Net Interest Margin Spread Analysis Pg 11
- ↑ STU 2007 10K Provision for Loan Losses Pg 12
- ↑ STU 2007 10K Regulatory Considerations Pg 29
- ↑ [1] GovTrack | H.R. 4137: College Opportunity and Affordability Act of 2007
- ↑ STU 2007 10k Legislative Activity Pg 17
- ↑ [2] New York Times | New Trouble in Auction Rate Securities. February 15, 2008.
- ↑ [3] Forbes | Lenders Drop Out of Student Loan Market. April 10, 2008.
- ↑ STU 2007 10K Economic Conditions Pg 26
- ↑ [4] CNN Money | Student Loan to Suspend Lending at Certain Schools, Withdraw from Fed. Market. April 16, 2008.
- ↑ STU 2007 10K Allowance for Loan Losses Pg 4
- ↑ STU 2007 10K Private Education Loans in Repayment Pg 8
- ↑ STU 2007 10K Private Education Loans in Repayment Pg 8
- ↑ [5] Boston Globe | MIT Expands Financial Aid. March 7, 2008.
- ↑ [6] Stanford Storybank | Big Boost to Stanford Financial Aid Program. March 10, 2008.
- ↑ [[stock:Student_Loan_Corporation_(STU)/Filing/10-K/2007/F5518636 | STU 2007 10K Competition Pg 23
- ↑ STU 2007 10K Competition Pg 23
- ↑ [7] Federal Student Aid Financial Partners Top 10 Originators of FFEL Program Loans in Fiscal Years 2007 and 2006
- ↑ [8] Federal Student Aid Financial Partners Top 10 Consolidators of Federal Loans in Fiscal Years 2007 and 2006
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