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After announcing its decision to move away from the physical commodities trading business, JPMorgan Chase & Co. (JPM - Analyst Report) is now closing another non-core operation. The company, in an internal memo to various colleges, has decided to shut down the student loan business.
Oct 12, 2013 onwards, JPMorgan will cease taking new student loan applications, having already restricted its student loans to Chase customers since the past year. Further, the company will make final loan disbursements prior to Mar 15, 2014.
In 2012, JPMorgan made $200 million worth of student loans, substantially lower from $6.9 billion in 2008. Moreover, the company’s student loan portfolio was $11 billion as of Jun 30, 2013.
In fact, JPMorgan is one of the last major banks to exit the student lending business. Bank of America Corporation (BAC - Analyst Report), U.S. Bancorp and Citigroup Inc. have already moved away from this business.
Reasons to Exit
The student loan business was turning out to be unprofitable for JPMorgan, after a 2010 law that allowed the government to lend directly to students. Earlier, private banks gave students loans, which were then guaranteed by the government.
Presently, the federal government issues approximately 93% of all student loans. Also, federal student loans are available to all undergraduates, without considering their credit history.
Further, banks and other private lenders are under pressure to provide flexible repayment terms on student loans. Also, many students are applying for loans offered by governments, given the low rate of interest and other advantages including deferment for unemployment or economic hardship.
Though the private student loan market has been shrinking, many students still opt for private funds after reaching the government borrowing limit. However, the interest rates on such loans turn out to be quite high when compared to federal student loans. Hence, regulators have been demanding private lenders to lower rates for distressed borrowers.
Further, there are greater chances of default in student loans. Thus, considering all these factors, JPMorgan decided to move away from the student lending operation.
Opportunity for Others
Though JPMorgan is exiting the student lending business, many other student loan lenders including SLM Corporation (SLM - Analyst Report), also known as Sallie Mae; Wells Fargo & Company (WFC - Analyst Report); and Discover Financial Services remain in business.
According to National Center for Education Statistics (2012) data, the cost of an average four-year college stint for tuition, lodging and boarding has presently skyrocketed to about $22,000 a year from under $9,000 (adjusted for inflation) in 1980–81. However, median family income has remained relatively stable at about $50,000, compared with $46,000 in 1980 (adjusted for inflation). In order to bridge this gap, most students end up taking exorbitant loans. Hence, these firms are ready to grab the market and fill the void once JPMorgan exits the business.
Correct Move for JPMorgan
Exiting the student lending business will expectedly help JPMorgan to invest in other areas of lending including auto loans and the real estate, which are experiencing a growing demand. Also, this will enable the company to post more robust results.
Further, this year, JPMorgan has taken other decisions that have helped it to concentrate on core operations. Apart from moving away from the physical trading commodity business, the company announced its private-equity unit’s divestiture and decided not to take any new business from foreign correspondent banks.
All these will likely help JPMorgan to comply with the new regulations and meet the strict capital requirement.
Currently, JPMorgan carries a Zacks Rank #3 (Hold).