Citibank (NYSE: C) and Wells Fargo (NYSE: WFC)’s student loan businesses are under threat as Congress works on the most significant overhaul of the financial aid system since it was introduced in the 1960’s, leading many to believe that Citibank’s and Wells Fargo’s lucrative student loans businesses soon may out of business as the government works to federalize student loan offerings.
At the heart of the legislation, Congress is aiming to get subsidized private companies out of the student lending business and turn it over to the government. Some predict that the proposal will eliminate up to $80 billion in costs by the end of the next decade by eliminating subsidies that are paid to lenders to keep their interest rates down.
The savings from the payment would be used to make colleges more affordable for low-income individuals by increasing the maximum Pell Grant by $1,400 up to a maximum of $6,900. In order to make up for the lack of affordable private student loans that are expected, the government is planning to offer additional low interest loans to students.
One of the cities that would be hit by the legislation the hardest is Sioux Falls, SD, which has over 1,200 people that work in student lending services for Wells Faro and Citibank. Because of South Dakota’s lax lending regulations, many companies such as Premier Bankcard, Citibank and Wells Fargo have their headquarters for their credit card and student loan businesses in South Dakota.
“This is a significant book of business that they are involved with and if it goes, the jobs go with it,” said Sen. John Thune, R-S.D. If the legislation passes, it’s estimated that up to 3,000 jobs could be lost across the state.
Both Wells Fargo and Citibank, two of the five largest student loan lenders nationwide, originate and service loans through the Federal Family Education Loan Program (FFELP), the system that accounts for three-fourths of all student loans.
The student loan reform legislation passed the U.S. House in September with a vote of 253-171 and will be going before the Senate early next year.