What if Sallie Mae stopped lending money tomorrow morning?

Darren Hughes · March 13, 2009

Just wondering what suggestions you guys have for other options for flight school financing. Are there any other well known companies that will lend $40K-$60K to someone who decides that they want to be a pilot for a living.

Obviously, the current economic climate(drink!) has tightened the lending practices of many a financial institution of late. And, with Sallie Mae getting real tight when it comes to lending, even to people with good credit and good co-signers. Where are we going to send the up and coming helicopter pilots of the future when they come-a-knockin' for ideas on financing?

The military is always a pretty popular recommendation, but I'm thinking more on the civilian side of things for the purposes of this discussion.

adam32 · March 13, 2009

Local banks, private loans (family, friends), re-finance house, work (two, three jobs) and pay as you go. Some big banks also have personal type/training loans and they are loaning to qualified people, not just anybody with a pulse like they used to.

Its a lot of money to try and come up with, but if people want it bad enough, they will find a way.

goromadgo · March 13, 2009

They may be heading this way already. From what we were told by our school owner about 2 weeks ago is that Sallie Mae is changing how they do loans (she was told this by her Sallie Mae rep). To get a loan they will be looking more at your credit history instead of your credit score...take that how you will. The part that will really impact our world, assuming this is all happening for sure, is that they are cutting WAY back on funding of non-traditional schools. She couldn't remember if they told her Western US or North-Western US, but they are only going to continue funding 10 of these schools in this region, with our school being one that would still receiving funding due to a low default rate. Out of the 300 or so schools (traditional and non-traditional) in the region that they had been funding, now only ~80 would continue to receive funds.

I applied for 30k with Sallie Mae when I wanted to start a few months back and was denied. I dropped it down to 20k and was denied. Both would have been approved with a cosigner and my Dad was willing to cosign. After cosigning (but before disbursement) we found out it would be at 11.5% plus variable. My Dad scoffed at that and thankfully had the funds to float me until my GI Bill kicks in after my PPL. This was also for 20k, which wouldn't get me too far. I was told to reapply for more money once I ran out, but I'm now hearing that a lot of people are having issues with this too!

Who knows where this is heading, but it doesn't look good. It could drive up the attendance of those schools that will be funded, but the others...? Thanks a lot Silverstate! Glad I dodged that bullet. Anywho, take how you will. Just what I've been hearing around the water cooler...

fry · March 13, 2009

From yesterday's WSJ:

SLM Corp., the largest U.S. student-loan company, has been grappling with an inability to access traditional funding sources because of tight credit markets.

Now the company, commonly called Sallie Mae, is dealing with a budget proposal by the Obama administration that would diminish the role of private lenders in federal student loans.

The stock has tumbled more than 60% this year, hitting a 52-week low of $3.11 on Friday, as investors worry whether the Reston, Va.-based company will lose a major source of income if the proposal is adopted.

But some analysts say investors are overreacting. "There's a lot of value in Sallie Mae's existing portfolio that doesn't change," says Matt Snowling, an analyst at FBR Capital Markets.

Sallie's business model will shift away from being a lender -- a business that had become difficult because of the current funding drought -- to being an originator and service provider, says Mr. Snowling. "That's not very different from now."

Sallie, which makes private and federal student loans, gets nearly one-third of its income from the federal student loans it makes on behalf of the government. While the mechanism is complex, Sallie earns a spread over its borrowing cost on the loans. The company earns about 60 cents for every $100 of federal student loans it makes, before expenses on the borrowings.

Sallie earns another third of its income from the interest it charges on private student loans. The remaining one-third of Sallie's profit comes from a number of smaller businesses, including fees from college savings plans and collecting defaulted student debt.

Private student loans, which aren't guaranteed by the government, are riskier -- and more profitable -- than federal loans. But private loan volume has declined because of the freeze in the credit markets where lenders like Sallie would fund these loans.

Sallie had $34 billion in private loans at the end of the fourth quarter and $146 billion in federal student loans.

The federal student loans come with a government guarantee that takes Sallie off the hook for losses stemming from defaulting borrowers. In addition, recent laws make it possible for Sallie to sell such loans to the government. This frees up capital, allowing Sallie to lend more.

Sallie originated $4.8 billion in student loans in the fourth quarter. Of these, new federal student loans totaled $3.9 billion, a 25% increase from a year earlier.

It's no wonder, then, that the Obama administration's proposal to eliminate the income that Sallie gets on federal student loans has investors heading for the exit.

One silver lining: The Obama budget proposal requires the participation of private lenders for the servicing of the federal student loans.

"We would expect Sallie Mae to be a front-runner for the business," says Richard Hofmann, an analyst at CreditSights, in a research note last month.

Private lenders have argued that the federal government and schools don't have the resources to make these loans on a large scale. Federal student loans made through private lenders totaled $56.7 billion in the current school year. The federal government loaned $20.1 billion directly to students this school year.

"We're more than just a loan company," says a Sallie spokeswoman. "We believe we have the service capabilities and competency to help the administration achieve its policy objectives."

Some analysts believe the government will need private lenders, such as Sallie, to handle loan processing and payment collection, although it is unclear what kind of fees the private firms will receive for such services.

Sameer Gokhale, an analyst at Keefe, Bruyette & Woods, estimates that Sallie could earn service fees of 15 cents to 20 cents after expenses for every $100 of federal student loans.

The government needs private lenders "as much as" the private lenders need the government, says FBR's Mr. Snowling. "The devil's in the details. We don't know what the service fees will look like. Until details emerge, there will be selling pressure."

Acting on these concerns, two of three major credit-rating companies recently said they may cut Sallie's high-grade credit rating. Strong credit ratings are essential for a lender that relies heavily on debt markets for financing.

So SLM's tightening it's private loan lending has nothing to do with the current credit "crisis"...or with SSH...and it is likely not a temporary condition. If one-third of SLM's income is eliminated or reduced and its credit rating is cut the company's ability to borrow funds to lend will be permanently impaired. It is not likely that SLM's private loan lending standards are going to loosen or that its rates are going to be reduced...especially for flight school students which have high default rates. Bottomline: borrowing to fly is going to be permanently out of reach for most aspiring fllght school students.

mikeconti · March 26, 2009

Interest rates are extremely high however a few of my students have recently had luck with Pilot Finance.

http://www.pilotfinance.com/pages/539359/index.htm

The website is informative however everything needs to be done by mail.

gary t · March 27, 2009

From yesterday's WSJ:

SLM Corp., the largest U.S. student-loan company, has been grappling with an inability to access traditional funding sources because of tight credit markets.

Now the company, commonly called Sallie Mae, is dealing with a budget proposal by the Obama administration that would diminish the role of private lenders in federal student loans.

The stock has tumbled more than 60% this year, hitting a 52-week low of $3.11 on Friday, as investors worry whether the Reston, Va.-based company will lose a major source of income if the proposal is adopted.

But some analysts say investors are overreacting. "There's a lot of value in Sallie Mae's existing portfolio that doesn't change," says Matt Snowling, an analyst at FBR Capital Markets.

Sallie's business model will shift away from being a lender -- a business that had become difficult because of the current funding drought -- to being an originator and service provider, says Mr. Snowling. "That's not very different from now."

Sallie, which makes private and federal student loans, gets nearly one-third of its income from the federal student loans it makes on behalf of the government. While the mechanism is complex, Sallie earns a spread over its borrowing cost on the loans. The company earns about 60 cents for every $100 of federal student loans it makes, before expenses on the borrowings.

Sallie earns another third of its income from the interest it charges on private student loans. The remaining one-third of Sallie's profit comes from a number of smaller businesses, including fees from college savings plans and collecting defaulted student debt.

Private student loans, which aren't guaranteed by the government, are riskier -- and more profitable -- than federal loans. But private loan volume has declined because of the freeze in the credit markets where lenders like Sallie would fund these loans.

Sallie had $34 billion in private loans at the end of the fourth quarter and $146 billion in federal student loans.

The federal student loans come with a government guarantee that takes Sallie off the hook for losses stemming from defaulting borrowers. In addition, recent laws make it possible for Sallie to sell such loans to the government. This frees up capital, allowing Sallie to lend more.

Sallie originated $4.8 billion in student loans in the fourth quarter. Of these, new federal student loans totaled $3.9 billion, a 25% increase from a year earlier.

It's no wonder, then, that the Obama administration's proposal to eliminate the income that Sallie gets on federal student loans has investors heading for the exit.

One silver lining: The Obama budget proposal requires the participation of private lenders for the servicing of the federal student loans.

"We would expect Sallie Mae to be a front-runner for the business," says Richard Hofmann, an analyst at CreditSights, in a research note last month.

Private lenders have argued that the federal government and schools don't have the resources to make these loans on a large scale. Federal student loans made through private lenders totaled $56.7 billion in the current school year. The federal government loaned $20.1 billion directly to students this school year.

"We're more than just a loan company," says a Sallie spokeswoman. "We believe we have the service capabilities and competency to help the administration achieve its policy objectives."

Some analysts believe the government will need private lenders, such as Sallie, to handle loan processing and payment collection, although it is unclear what kind of fees the private firms will receive for such services.

Sameer Gokhale, an analyst at Keefe, Bruyette & Woods, estimates that Sallie could earn service fees of 15 cents to 20 cents after expenses for every $100 of federal student loans.

The government needs private lenders "as much as" the private lenders need the government, says FBR's Mr. Snowling. "The devil's in the details. We don't know what the service fees will look like. Until details emerge, there will be selling pressure."

Acting on these concerns, two of three major credit-rating companies recently said they may cut Sallie's high-grade credit rating. Strong credit ratings are essential for a lender that relies heavily on debt markets for financing.

So SLM's tightening it's private loan lending has nothing to do with the current credit "crisis"...or with SSH...and it is likely not a temporary condition. If one-third of SLM's income is eliminated or reduced and its credit rating is cut the company's ability to borrow funds to lend will be permanently impaired. It is not likely that SLM's private loan lending standards are going to loosen or that its rates are going to be reduced...especially for flight school students which have high default rates. Bottomline: borrowing to fly is going to be permanently out of reach for most aspiring fllght school students.

Permanently, as in forever? No way, Dr. Gloom 'n Doom. Ultimately, there will be better instruments developed to lend to students. But it may be an administration or two away.

kodoz · April 4, 2009

And there you go....

fry · April 4, 2009

Sallie Mae Slashes Flight Training Loans

http://www.aopa.org/training/articles/2009...WT.mc_id=090403

May 8th is the cutoff.

auto360 · April 6, 2009

So here is my question which may be a little difficult to ask. In a few months I will have my money for school saved up. Now, hopefully I can stay employed a little longer because ultimately I need more than what school cost but it won't take long to save the extra...as long as I stay employed.

So, lets say a year from now I'm ready to go to school and then lets say I'm in school for a year. Now, I know its impossible to predict but I wonder how the training market as far as hiring will be in 2 years. I would imagine that in 2 years from now there will be even fewer schools, and fewer students but I'm hoping that I will still be Ok. Actually, I shouldn't say "hoping" because I have spent 3 years so far saving for this and I will do it and doesn't matter how long it takes to find a job though preferrable less than a decade Anyway, its all kinda fun to think about. I mean, if there are 30% less students, schools and instructors then it will all even out. I think for a little while though it will be less schools and less students but still maybe a few too many intructors.

Darren Hughes · April 6, 2009

Auto360, congrats on getting the funds together to pay for your flight training without getting yourself into debt. That in itself will put you in a good position after you're done with your training. At least then, everything you make as a flight instructor won't be going to paying off a loan and its crazy interest.

It seems like there will always be less flight instructor positions than there are instructors to fill them. If we believe what most of the economists are saying right now, the current downturn in the economy should start to slow down by the end of this year. That doesn't mean that everything will return back to normal straight away. Far from it, I would say. If the recession does start to slow down, slight recovery should be seen by the end of next year according to these so called "experts".

Part of the problem in the helicopter training industry right now, is also caused be the influx of out of work instructors that resulted from the Silver State fiasco. Over time, this influx should dwindle as many of these guys manage to creep towards the 1000-1500 hour mark. Looking at the bigger picture, even with a few of the weaker schools going out of business here and there due to the loss of the Sallie Mae loans and other tighter lending practices, we shouldn't see anything like the influx that Silver State caused.

There's no denying that getting through those first couple of years in this industry as a low time pilot is a total bitch. But, you seem dedicated to the cause, so I'm sure employers will see that and respond accordingly. Half your battle is now almost over, which is paying for flight school. Most people carry that burden for 10-15 years after completing their training. Well done!!

auto360 · April 7, 2009

Thanks for the positive words there Darren. I have already accepted the fact that its not going to be easy but everything normally works out for me even when it "doesn't" if you know what I mean. With no debt, decent savings and no wife or kids it will be a little( or a lot) easier then it would be carrying a loan and having a family to support plus maybe having to move. I know that one guy in this forum lost his house. Thats tough of on everyone!

So yeah, I don't think I can even plan the date for school. I think something may happen that signifies the time to start. Its seems to happen that way so often but I will be prepared. I suppose the only thing that I know I don't want is too have too much time inbetween school and the forst instructing job but thats so far down the road I don't put much thought into it.

Ok, that's from me.

Matt