President Obama’s signing of the Health Care and Education Reconciliation Act will have unintended effects on the education industry as it eliminates the Federal Family Education Loan Program (FFELP). From the investor’s point of view, what does this all mean for standalone student loan companies, banks, and for-profit education companies?

One element that’s easy to agree on is that a lot of jobs will be lost. The only traction the student lending industry generated in opposition to the bill was based on the prospect of significant job loss - that’s now a reality. Sallie Mae has announced its intention to cut 2,500 jobs and a number of small lenders have indicated their intention to exit the marketplace altogether.

The for-profit segment of the education industry is also under siege. The Department of Education’s proposed “gainful employment” regulation is likely to affect as much as 25% of the programs offered at numerous for-profit schools.

The third factor affecting student lenders comes from bankruptcy loan reform. Beginning in 2014, loan payments will be capped at 10% of a borrower’s discretionary income, down from the current 15% cap. Moreover, any borrowed amount not paid after 20 years, compared to today’s 25 years, will be forgiven and public service workers will earn forgiveness in just ten years. This will have a long-term, sizable affect on the student loan market.

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Tags: direct loan, ffelp loans, investors, layoffs, private student loans, Sallie Mae, student loan lenders, student loan reform, student loans bill, student loans obama

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