Subprime Student Loans?

Last Thursday, Sallie Mae announced a $1.6 billion loss—a bad day capping the end of a bad year for the company. Sallie Mae also announced that it would be cutting back on loans to nontraditional schools, especially schools with low graduation rates. Echoing the sentiments of banks who bet too much money on bad real estate loans, Al Lord, Sallie Mae’s chief executive, said "Sallie Mae has lent too much money to students who have gone to schools without very good graduation records." And now the company is looking to make some changes.

The first schools to feel the hit were for-profit career colleges—Career Education Corp., Corinthian Colleges, and ITT have all announced that Sallie Mae is cutting back on loans for their students. For-profit colleges are understandably nervous about this, and if these cuts start to limit students’ access to federal loans, it could be cause for concern. But right now, it looks like the cuts are mostly focused on the previously fast-growing private loan sector of Sallie Mae’s business—loans that don’t include the protections or guarantees of federal loans. And this may just be a good thing.

It’s not hard to see parallels between subprime mortgages and programs like Sallie Mae’s “opportunity loans” in which private loans were provided to students with poor credit ratings. While these loans might provide students with the money they need to attend college in the short-term, it’s hardly an opportunity if the students don’t have the financial resources to repay the loans. And hopefully it will encourage some of these colleges to shift their focus from simply getting students in the door, to also graduating them and helping them to get a job.