After announcing its decision to move away from the physical
commodities trading business,
JPMorgan Chase & Co.
) 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.
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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,
In fact, JPMorgan is one of the last major banks to exit the
student lending business.
Bank of America Corporation
), U.S. Bancorp and Citigroup Inc. have already moved away from
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
), also known as Sallie Mae;
Wells Fargo & Company
); 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).