Home > News > How a Little Student Loan Deal Could Spell Big Trouble for Borrowers

Comments 1 Comment
Advertiser Disclosure


The Reuters headline is big and bold: “Wells Fargo to sell $8.5 billion of federal student loans to Navient.”

If you’re thinking, “It’s hard to get all worked up over an $8 billion deal when there’s more than $1.2 trillion-worth of loans out there,” think again.

The contracts that Wells Fargo Corporation is selling to Navient represent loans that were made under the now-defunct Federal Family Education Loan program. FFELs are government-guaranteed student loans that were originated by a network of banks and other private-sector lenders. Approximately $300 billion are currently outstanding, of which Navient is reportedly the single largest owner/administrator.

Government-guaranteed consumer debts—whether they take the form of residential mortgages or education loans—make for very appealing investments to yield-hungry but risk-averse investors. That’s because for all the reckless, politically-motivated bluster, everyone knows that when push comes to shove, the U.S. government always honors its financial obligations.

Navient should have little trouble financing this acquisition, probably the same way it and its former corporate parent, Sallie Mae, have financed much of their previous FFEL purchases: securitization. In this case, though, that task will be a tad less difficult to accomplish, thanks to the financing facility that Wells Fargo is setting up to help complete the sale.

So why should a deal that amounts to decimal dust in the scheme of things attract more than passing attention?

Well, ever since the feds terminated the costly FFEL program in 2010, the government has been lending money on a direct basis to college students and to their parents, to the tune of some $600 billion that now resides on the DOE’s balance sheet.

Given the recent shift in the balance of power to more conservative mindsets, it’s a safe bet that pressure will be brought to bear on the department to shrink the size of that balance sheet by selling all or part of its education-loan portfolio. The money the government borrowed to fund that activity in the first place would then be repaid from the proceeds.

The political benefit is obvious.

Loan sales worth $600 billion will generate enough cash to retire roughly the same amount of government borrowings. Therefore, the party that pulls that off can rightly claim to have engineered a substantial reduction in the national debt. (Of course, that doesn’t account for the forgone value of the deficit-reducing profits that this lending program continues to generate, but that’s a discussion for another day.)

If the DOE does indeed end up feeling compelled to lighten its load—which is likely because of the consistently high demand for Federal Direct Loans—what form would the transactions take and to whom would the contracts be sold? Hint: Look to the Wells Fargo-Navient deal for direction.

And therein lies the problem.

What About the Borrowers?

The reason why so many loan-servicing companies are the subject of consumer ire and regulatory action is because these firms first attend to the interests of their benefactors—the lenders and investors that originate and own the loans—before those of financially distressed borrowers in need of assistance or the taxpayers who are left holding the bag when they end up defaulting.

So when lawmakers talk about reducing the deficit and if downsizing the DOE’s portfolio becomes an integral component of their plan for accomplishing that, it’s important they use the size of a prospective deal to good advantage.

Loan originators that negotiate their own financing transactions are in the best position to bargain for terms that can reasonably satisfy everyone’s interests. In this instance, the DOE would get to pay off its debts, investors would earn a fair rate of return with little downside risk (thanks to the government’s backstop) and distressed borrowers would gain unfettered access to the relief they need. (Of course, the financial-services industry stands to make a fortune in investment banking fees for putting that all together, but that too is another matter for another day.)

The point is this: That “little” deal between Wells Fargo and Navient is a harbinger of things to come. Sometime soon, a mass of Federal Direct Loans is going to find its way into the private sector. When that happens, let’s hope that lawmakers will have already devised a plan that does right by borrowers and taxpayers alike.

This story is an Op/Ed contribution to Credit.com and does not necessarily represent the views of the company or its partners.

More on Student Loans:

Image: Robert Churchill

Comments on articles and responses to those comments are not provided or commissioned by a bank advertiser. Responses have not been reviewed, approved or otherwise endorsed by a bank advertiser. It is not a bank advertiser's responsibility to ensure all posts and/or questions are answered.

Please note that our comments are moderated, so it may take a little time before you see them on the page. Thanks for your patience.

  • KWilson

    Actually DOE is the Dept of Energy, ED is the Dept of Education. If ED does sell it’s direct loan portfolio it will still have to be serviced with the same borrower protections such as deferment, forbearance and due diligence of delinquent borrowers otherwise the guarantee will be lost and the loans will lose their value. It likely won’t even be moved to a different servicer as a result of sale so it will be transparent to borrowers. There isn’t anything new about the Wells-Navient sale. These transaction happened all the time prior to the end of new FFEL originations and have continued after. ED doesn’t have to look at that particular sale to understand how to sell their direct loan portfolio.

Credit.com receives compensation for the financial products and services advertised on this site if our users apply for and sign up for any of them.

Hello, Reader!

Thanks for checking out Credit.com. We hope you find the site and the journalism we produce useful. We wanted to take some time to tell you a bit about ourselves.

Our People

The Credit.com editorial team is staffed by a team of editors and reporters, each with many years of financial reporting experience. We’ve worked for places like the New York Times, American Banker, Frontline, TheStreet.com, Business Insider, ABC News, NBC News, CNBC and many others. We also employ a few freelancers and more than 50 contributors (these are typically subject matter experts from the worlds of finance, academia, politics, business and elsewhere).

Our Reporting

We take great pains to ensure that the articles, video and graphics you see on Credit.com are thoroughly reported and fact-checked. Each story is read by two separate editors, and we adhere to the highest editorial standards. We’re not perfect, however, and if you see something that you think is wrong, please email us at editorial team [at] credit [dot] com,

The Credit.com editorial team is committed to providing our readers and viewers with sound, well-reported and understandable information designed to inform and empower. We won’t tell you what to do. We will, however, do our best to explain the consequences of various actions, thereby arming you with the information you need to make decisions that are in your best interests. We also write about things relating to money and finance we think are interesting and want to share.

In addition to appearing on Credit.com, our articles are syndicated to dozens of other news sites. We have more than 100 partners, including MSN, ABC News, CBS News, Yahoo, Marketwatch, Scripps, Money Magazine and many others. This network operates similarly to the Associated Press or Reuters, except we focus almost exclusively on issues relating to personal finance. These are not advertorial or paid placements, rather we provide these articles to our partners in most cases for free. These relationships create more awareness of Credit.com in general and they result in more traffic to us as well.

Our Business Model

Credit.com’s journalism is largely supported by an e-commerce business model. Rather than rely on revenue from display ad impressions, Credit.com maintains a financial marketplace separate from its editorial pages. When someone navigates to those pages, and applies for a credit card, for example, Credit.com will get paid what is essentially a finder’s fee if that person ends up getting the card. That doesn’t mean, however, that our editorial decisions are informed by the products available in our marketplace. The editorial team chooses what to write about and how to write about it independently of the decisions and priorities of the business side of the company. In fact, we maintain a strict and important firewall between the editorial and business departments. Our mission as journalists is to serve the reader, not the advertiser. In that sense, we are no different from any other news organization that is supported by ad revenue.

Visitors to Credit.com are also able to register for a free Credit.com account, which gives them access to a tool called The Credit Report Card. This tool provides users with two free credit scores and a breakdown of the information in their Experian credit report, updated twice monthly. Again, this tool is entirely free, and we mention that frequently in our articles, because we think that it’s a good thing for users to have access to data like this. Separate from its educational value, there is also a business angle to the Credit Report Card. Registered users can be matched with products and services for which they are most likely to qualify. In other words, if you register and you find that your credit is less than stellar, Credit.com won’t recommend a high-end platinum credit card that requires an excellent credit score You’d likely get rejected, and that’s no good for you or Credit.com. You’d be no closer to getting a product you need, there’d be a wasted inquiry on your credit report, and Credit.com wouldn’t get paid. These are essentially what are commonly referred to as "targeted ads" in the world of the Internet. Despite all of this, however, even if you never apply for any product, the Credit Report Card will remain free, and none of this will impact how the editorial team reports on credit and credit scores.

Your Stories

Lastly, much of what we do is informed by our own experiences as well as the experiences of our readers. We want to tell your stories if you’re interested in sharing them. Please email us at story ideas [at] credit [dot] com with ideas or visit us on Facebook or Twitter.

Thanks for stopping by.

- The Credit.com Editorial Team