Overhauling Federal Student Lending: The Impact and the Opportunity that Remains

On Sept 17, the House passed a bill to eliminate the FFELP student loan program. Scott Patterson reviews the impact this change could have on members and credit unions, as well as reviewing the opportunity that still exists in private student lending.


Promising to save billions in lender subsidies over the next decade, the House of Representatives passed a bill on September 17th that would eliminate the Federal Family Education Loan Program (FFELP)—a public-private partnership created in 1965 that allows private lenders to originate and administer federally guaranteed student loans. This measure would cut out lenders from originating federal student loans and transition all loans to the Government’s Direct Loan program.

This is a major shift as evidenced by the fact that private lenders, led by such well-known names as Sallie Mae and CitiBank, originated almost $55 billion in federal student loans in 2007-08 alone—representing 75% of all federal loans issued that year. While the degree of impact will vary, this bill will have ramifications for students, colleges, and lenders, including credit unions.

What is the impact on members (students and families)?

In the long-term, the impact will be negligible. Federal student loans (such as Stafford Loans) are the cheapest, most widely used option for college students. And because the rates and terms are set by the Government, the loan is basically the same whether the student is borrowing from a private lender or the government. In the near-term, service could be negatively affected as thousands of schools must be on-boarded to the Government’s Direct Loan program.

What is the impact on credit unions?

It depends on the credit union. While many credit unions have participated in FFELP, only a handful were ranked in the top 100 FFELP lenders in 2007-08 and only a few dozen have a significant portion of federal student loans in their portfolio. For those credit unions, this legislation has serious ramifications and will potentially force a major change to their business model. However, for the vast majority of credit unions, being cut out of originating federal student loans will have very little affect on their balance sheets.

What is the impact on Private Student Loans?

This legislation has no impact on private student loans, which are meant to help students fill educational financing gaps that are left behind after all other sources of lower cost financial aid (scholarships, grants, federal student loans) have been exhausted. While they do share the same bankruptcy exemption as federal student loans, private loans are credit-based, financed and administered by private lenders, and completely separate from the federal government. The demand for these loans remains very strong—to the tune of nearly $15 billion thus far in 2009. In light of ongoing economic challenges and ever-increasing college costs, this demand is sure to continue for many years to come.

Regardless of what eventually happens to FFELP, credit unions have an excellent opportunity in private student lending. Finding a federal student loan is not a challenge for students and families. Finding a fair-value private student loan, however, is a strategic need for tens of thousands of students—a need that will ultimately determine their ability to attend the college of their choice. Credit unions, as not-for-profit financial cooperatives, have an opportunity to leverage their balance-sheet lending capability and unique business model to deliver superior economic value to members and a solid return to the cooperative.




Sept. 21, 2009


  • I've struggled for several years to find FFELP-eligible credit unions that could receive my student loan business but have always come up without any options. It's this poor marketing on the part of the CU movement that has led me to fully support the Direct Loans initiative and cessation of the FFELP program. If I had been able to direct these government handouts to my credit union, I would have. Directing the handouts to the for-profit banks is not appealing to me, so I'd rather the government, through Direct Loans, receive the rewards of the risks they're already taking by guaranteeing the loans, rather than having that nearly risk-less income going to "capitalist" banks like Citi or entities like Sallie Mae.