CITGroup Closes Its Wallet To Student Lending

Implications: CIT Group drew down emergency credit lines totaling $7.3 billion in March 2008, after being cut off from customary sources of cash, forcing CIT to scrap its government-backed student loan program on 4.3.08. Due to its weak position, CIT may be a prime takeover target. The lack of investor demand has made it harder for student lenders such as CIT to raise money to finance their operations. In 4Q07, CIT reported a $302.5 million "goodwill impairment" charge against its student loan division, which reflected an erosion in the value of the business. New legislation was enacted in 2007 that slashed private lending subsidies by about $20 billion and higher costs to securitize assets for student loans proved to be less profitable for CIT. CIT has also offloaded some of its riskier operations including mortgage and private student lending. To add salt to CIT's wounds, the NY Attorney General has subpoenaed CIT's "Student Loan Express,"  for allegedly mailing fake checks and rebates.

Analysis: Most student loans are backed by the federal government, such as the Stafford and Federal Family Education Loan Program (FFELP), which reimburses lenders up to 97% of losses if students default on their loans. In March 2008, CIT had to tap its entire $7.3 billion emergency credit line. Both CIT Group and NorthStar Education Finance Inc. announced last week that they would stop making new loans to U.S. students because lending costs had skyrocketed and on concerns that defaults may rise as the economy could potentially enter a recession.

1.  About 40 lenders have ceased to write some form of student loans as the cost to raise money in the asset-backed market has skyrocketed and sales of bonds backed by student loans have dropped by 65% in 2008, compared to 1Q07

2.  Congress enacted changes in September 2007, that increased the costs for student loan companies to originate new loans under the Federal Family Education Loan program (FFELP)

Takeaway:  Students  borrow approximately $85 billion annually to finance the costs to attend college and the demand for private education loans surged by 27% over the last six years, however, the tide has shifted and investors appetite for this type of debt is drying up as student lenders scrap or downsize their student loan programs as a result of legislation passed during September 2007, that cut federal subsidies by approximately $20 billion to student lenders. In addition, the industry received a black eye when allegations surfaced of improprieties among student loan lenders and financial aid directors at major institutions in the U.S. Allegedly, student loan lenders wooed financial aid directors with trips, gifts and payouts to encourage them to direct students applying for student loans to specific lenders and some student lenders paid out millions in fines after the NY Attorney General launched a probe of deceptive loan practices.