Student loan providers are collecting less interest at a time when their capital costs are rising. This has caused losses for industry leader Sallie Mae, and forced CIT Group, Bank of America, Washington Mutual and NelNet Inc. out of certain corners of the market.
Last year, the federal government cut the interest rate that can be charged on federal student loans. It also cut reimbursements to lenders in the event of default. The changes come at a tricky time. Lenders profit by packaging loans to resell to investor. Skittishness in the bond market is making the loans harder, or in some cases impossible, to sell.
But the federal government, keen to ensure students can afford college, recently passed a law empowering the Education Department to buy hard-to-sell student loans.
As a result, Citi Investment Research analyst Bradley Ball calls the bill a near-term positive, saying "we could see pricing levels that are sufficient to encourage lenders to make loans."
Ball currently has a "Hold" rating on Sallie Mae, the nation's largest student lender known legally as SLM Corp. The company's stock has tumbled nearly 60 percent over the 52 weeks, but has gained almost 8 percent since the start of the year.
Ball also says funding cost challenges are far from over for Sallie Mae. While buyers appear willing to commit to larger deals, "financing costs remain prohibitively high _ suggesting there's no end in sight to market dislocation."
Friedman Billings Ramsey analyst Matt Snowling rates Sallie Mae "Outperform," partly because he thinks the government will ensure the company can keep issuing student loans.
Snowling rates NelNet, which swung to a loss in the latest quarter, hurt by restructuring-related charges, a loss on the sale of loans and a steep drop in interest income, "Market Perform." Its shares have lost 47 percent over the past 52 weeks, but they have climbed 4 percent since the start of the year.
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