By Peters, Andy
American Banker , Vol. 177, No. 51
Byline: Andy Peters
A number of smaller banks are considering making more student loans, even as bigger banks head for the exits.
It is unclear if small banks can benefit from a pullback by bigger banks. Student loans could offer a way for small banks to diversify, not to mention access to a large market that's growing.
There are plenty of possible deterrents, including a proposal by Sen. Richard Durbin to let borrowers discharge private student loans in bankruptcy. It is also unclear how the Consumer Financial Protection Bureau will regulate private student lenders.
Some bankers believe that they can succeed with student lending as long as they are disciplined.
"We're still looking to see if it is something we want to stay in but so far we've gotten good feedback," says Todd DeFee, the retail and student loan officer at Peoples State Bank in Many, La., which began making student loans for the 2011-12 academic year.
Peoples began making loans after clients for help sending their children to nearby Northwestern State University. "It peaked the interest of the higher ups," DeFee says, adding that the $497 million-asset bank is talking to bigger schools such as Tulane University and Louisiana State University.
Potential bankruptcy changes could cause trouble, but otherwise now is a good time for small banks to enter the business, says Kevin Moehn, a Reston, Va., consultant who works with community banks on student loans.
The market appears ready for new lenders, just two years after the federal government eliminated subsidies and became a direct lender. U.S. Bancorp late last month pulled out of the market, and JPMorgan Chase sharply reduced its lending in the area. Small banks such as First Financial Bankshares in Abilene, Texas, have also exited the business.
Students continue to enroll in college, apply for loans, and amass debt. Total outstanding student debt in the United States topped $1 trillion this year, Rohit Chopra, the CFPB's student loan ombudsman, said in March.
Shakeout from the government's decision to become a direct lender means market boundaries are clearly set for banks, Moehn says. The size of the federal loan market is about $100 billion, and the private loan market is about $9 billion and growing, he adds.
That's a huge amount of business, providing plenty of growth opportunities for community banks, says Moehn, who is also associated with Student Loan Finance, an Aberdeen, S.D., company that administers student loans for smaller banks.
Some smaller banks exited student loans in recent years because of the difficulty in securitizing the loans. Since there is no market for securitizations, banks that make student loans should be prepared for the long haul. "Banks should be looking at putting these loans on their balance sheets and keeping them there," Moehn says.
Changes notwithstanding First Financial is not looking to reenter the market, says Bruce Hildebrand, the $4. …