Bank Exits Student Loan Program

[May 14, 2008.]

Zions Bank has become the latest financial institution to exit the federal student loan program.

Zions happens to be the largest bank in Utah.  Bank officials there have decided to stop accepting new loan applications through something called the Federal Family Education Loans program.

An official with Zions said that, given the changes in legislation that have occurred, it is no longer financially viable to accept applications for federally-backed student loans.

Back in September, Congress passed the College Cost Reduction and Access Act.  The legislation is designed to make college more affordable by cutting interest rates on loans in half.  The measure also expands Pell Grant awards and creates an income-based loan repayment plan.

However, the legislation also reduced subsidies to banks.  As a result, financial institutions now receive lower rates of return from the federal government for providing student loans.  That has made it more difficult for commercial banks to remain in the student loan business.

According to a student aid website known as FinAid.org, the lenders who have left the program represent nearly 10% of Stafford and PLUS loan volume and nearly 30% of the consolidation loan market.

Under the Stafford program, students can borrow up to $23,000 for college costs.  Meanwhile, PLUS loans can cover the full cost of college and are extended to students and their parents.  With consolidation loans, students can take several loans and combine them so that they only have to make one monthly payment.

In the year 2006, Zions extended $86 million in new student loans.  That caused the bank to be ranked 61st among the country’s top 100 lenders.

However, while Zions’ departure from the student loan market may be bad news for students, there will be other financial aid available.  The head of the Utah Higher Education Assistance Authority said that it has enough financial reserves to meet student needs this year.