What Wells Fargo’s exit from student lending means for competitors

Wells Fargo’s recently announced exit from private student lending figures to give competitors an opportunity to grab market share at a time when the sector’s prospects are threatened by declining college enrollment and the possibility of Joe Biden becoming president and making college free for many families.

Wells notified customers last month of its plan to stop offering student loans, though it is continuing to accept applications from its current customers through January. The San Francisco bank’s $10 billion student loan portfolio is comparable in size to that of rival Discover Financial Services. Both lenders trail market leader SLM Corp., better known as Sallie Mae, which has $21 billion in private education loans outstanding.

During the third quarter, student loan originations at Wells Fargo declined by 56% compared with the same period a year earlier, which the company attributed to lower demand because of the coronavirus pandemic, though the company’s pullback from the market may have also had an impact. At Sallie Mae, student loan originations were down by 16%.

As of late September, U.S. undergraduate enrollment was running 4% below last year’s level, according to the National Student Clearinghouse Research Center. On Thursday, executives at Sallie Mae projected optimism about the continuing ability of colleges and universities to offer in-person learning during the pandemic, which helps to shore up enrollment.

“Despite headlines, our own research indicates only 15% of our colleges and universities are completely online. The remaining 85% are on campus in one form or another,” Sallie Mae CEO Jonathan Witter said during a call with analysts. “We are also beginning to hear encouraging news from colleges and universities about their plans for the spring.”

Analysts at Credit Suisse wrote in a research note Thursday that they expect student loan originations to improve in the second half of next year due to improvements in treatment of the virus and the fact that students generally want to be on campus.

Private student lenders could face additional headwinds if Democrat Joe Biden gets elected president. The former vice president has endorsed tuition-free college for families earning less than $125,000 per year, doubling the size of Pell grants and free community college for everyone.

Biden has also embraced the idea of allowing private student debt to be discharged in bankruptcy, which would undo part of a 2005 bankruptcy law that he championed as a senator.

Wells Fargo, which is bumping up against an asset cap imposed by the Federal Reserve Board, has explained its decision to exit student loans by stating that the segment is not one of its core businesses.

Another factor in Wells Fargo’s decision-making may have been the fact that student loans held by banks get less favorable accounting treatment under the Current Expected Credit Losses standard than they did previously.

Wells has not announced plans for its existing student loan portfolio, which has an average borrower credit score of 771. Some 84% of the bank’s loans outstanding have been co-signed by a parent or someone else.

Discover CEO Roger Hochschild said Thursday that it is difficult to understand the impact of Wells’ departure on the market because the company’s exit happened in the middle of the lending season for the 2020-21 academic year. But, he said in an interview, “I think in any business it’s good to have fewer competitors versus more.”

Witter of Sallie Mae cited COVID as another factor that complicates the ability of lenders to gain ground in the short term.

“Obviously this year is a noisy year,” he said. “While it’s difficult to predict the exact impact, it’s hard to imagine that the current competitive situation would not benefit us in the medium to longer term.”

Other companies that compete in the private student lending realm include PNC Financial Services Group, Citizens Financial Group and Navient Corp.

Navient CEO Jack Remondi predicted Wednesday that other national banks will continue to shy away from student loans. Citigroup sold its private student lending business to Discover and Sallie Mae in 2010.

“With Wells’s departure, there really is no national branch bank player left originating in-school loans,” Remondi said during a call with analysts. “So we think this is a good opportunity for us.”

Private student loans outstanding in the U.S. totaled roughly $132 billion at the end of March, comprising roughly 7.9% of a market dominated by federally backed loans, according to estimates from the data provider MeasureOne. Loan originations have grown steadily since the Great Recession — from $4.3 billion in the 2010-11 academic year to $9.0 billion in the school year that ended last spring.


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