On Thursday, the House of Representatives approved a bill that would effectively eliminate the role of private lenders in the student loan market and establish the government as the sole lender of student loans under a program run by the US Education department.

The bill, which was passed with a 253-171 vote, will now be reviewed by the Senate. If enacted, the bill would put an end to the Federal Family Education Loan Program and severely impact banks, particularly student lender SLM Corp. or Sallie Mae (SLM).

Besides Sallie Mae, other companies who could be at risk under the new legislation are Student Loan Corp. (STU), Nelnet Inc. (NNI), ITT Educational Services (ESI), SunTrust Banks (STI) and Corinthian Colleges Inc. (COCO).

According to the Congressional Budget office, this bill would save taxpayers $87 billion over the next 10 years. These savings would be used for increasing low-income student’s grants and minority students’ funding.

If enacted, Sallie Mae is expected to be a major participant in the Department of Education’s servicing contract under which it will service and collect government guaranteed loans. Though the bill would allow some private firms to remain in the market as loan servicers, this business would be much smaller compared to loan originations.

Sallie Mae’s ratings were downgraded this week by Fitch ratings with a negative outlook. The ratings downgrade reflects the agency’s concern about the company’s business model. Fitch expects the company to continue to shift to a fee-for-service business model with its subsidiary Sallie Mae Bank originating higher-risk private education loans.

Zacks Investment Research
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