How will Student Loans do in the Stimulus

It looks like the stimulus package is taking shape.  While the bill is good news for some (the construction industry, banks) and definitely bad news for others (families that drink milk), it seems to be putting a lot of emphasis on investment in education.  Some of that investment carries over to construction spending, as it looks like the government will be putting more dollars into building schools. This seems like a sustainable, long-term use for stimulus.

On the other hand, there is a lot of evidence that the stimulus is also going to help out the student loan industry.  Bear in mind that the student loan business has been suffering.  The 2008 renewal of the Higher Education Opportunity Act stripped out some subsidies for student loan providers.  The best loans (from the perspective of students) have had rate caps applied to their loan pricing.  This means that if you can get a government student loan, you are doing well.

For private lenders, the last year has been an unmitigated bath.  First Marblehead (FMD) has dropped from as high as $60 a share down to about $1.10.  It looks like even MBA students are having a harder time getting loans.  Ouch!  Liquidity is part of the problem.  There hasn’t been a securitization in about a year.  Student Loan (STU) has witnessed a drop in its quarterly net income, year over year, by 73 percent.

Student loans are not performing that well in the downtown.  More students are seeking forebearances are their loans as the payments come due.  The student loan default rate on recent FMD securitizations has increased to over 6 percent.

The best part of the new stimulus package is that it is going to provide a big increase in Pell Grants.  The bill could increase both the absolute sum of funds that go to Pell Grants, as well as increasing the maximum amount of grant that any particular student can get in a given semester.  It looks like the new maximum will go up $500, to $5321.  This kind of funding really opens the door for many students to enroll in community colleges at no cost, provided that they can satisify a means test for income.   It could have some unintended consequences, of course, if colleges just decide to raise prices because of the benefit of a third-party payer putting new demand on the system.  It could also lead to great opportunities for private, for-profit schools like the University of Phoenix or Grand Canyon University.  The latter, by the way, just completed an IPO.

~ by samsondoggie on January 28, 2009.