With 27% of student debtholders holding a past-due balance, and with the Consumer Finance Protection Bureau estimating the total size of student debt at more than $1 trillion, it's a good time to ask who actually holds these loans. It turns out that it's not just the government, but potentially companies you own.
But it is, mostly, the government
The Federal Direct Loan Program (FDLP) makes up the majority of federal student aid disbursed in any year, with $116 billion out of total federal aid of $156 billion in 2011. The runner-up, Federal Pell Grants, makes up a bulk of the rest, accounting for $36.5 billion in 2011. Where do these billions come from? The FDLP "is funded by borrowings from the U.S. Department of Treasury, as well as an appropriation for subsidy costs." While these FDLP loans need to be repaid along with interest (with the interest rate for new loans at a hefty 6.8%), Pell Grants are not repaid.
Who else holds federal loans?
There existed another type of loan under the Federal Family Education Loan Program (FFELP). Students received these federal loans through different lenders, such as SLM's (Nasdaq: SLM ) SallieMae, which the government insured against default. But under the Student Aid and Fiscal Responsibility Act (SAFRA), no new FFELP loans have been originated, or handed out, since July 2010. Companies like SallieMae still service and collect on existing FFELP loans, and SallieMae is "actively seeking to acquire additional FFELP loan portfolios."
According to SallieMae, there exists $475 billion in FFELP loans, of which it owns $148 billion. Here are other top holders of FFELP loans:
||FFELP Amount Held in 2010 (in Billions)
|Wells Fargo (NYSE: WFC )
|JPMorgan Chase (NYSE: JPM )
|Pennsylvania Higher Education Assistance Authority
Source: SallieMae's "Citi 2012 Financial Services Conference" presentation.
Beyond federal loans
Then, aside from federal student loans, the murky private student loan exists. Not very much is known about this market. As the Consumer Finance Protection Bureau states, the "private student loan market is one of the least understood credit markets." The bureau is preparing a report to be submitted to Congress this summer to help better understand private student loans.
So what do we know about them?
While some companies are raising both hands and jumping wildly to provide these loans, others are playing hooky on the entire market. For example, SallieMae increased private loan originations more than 18% year over year, for a total of $2.7 billion in 2011, and Discover Financial Services bought up Citigroup's (NYSE: C ) $2.5 billion portfolio of student loans. On the other hand, JPMorgan recently announced that it will restrict new student loans to its own customers, and US Bancorp (NYSE: USB ) has pulled out of providing any new student loans.
The default rate of these loans varies greatly. SallieMae reports charge-off rates, or loans predicted to go uncollected, of traditional private loans made with a cosigner to be at 1.7%, while its non-traditional loans without a cosigner claim charge-off rates of 13.6%. JPMorgan's charge-off rate for student loans was 3.1% in 2011, up from 2.6% in 2010.
Who holds these loans?
Both the government and private lenders hold the loans. And while federal loans can be tallied, private loans are less transparent, which the Consumer Finance Protection Bureau is working to clear up this summer. If you believe student loans represent an ever worsening market to be in, take note if your financial stocks hold any student loan portfolios, and consider financial stocks that avoid holding the wrong side of student debt.
For one bank stock that holds no portfolios of student loans that might have interested Warren Buffett during his earlier years, check out our free report: "The Stocks Only the Smartest Investors Are Buying."