CIT Group said Thursday it is no longer making student loans, as the struggling finance company moves out of consumer lending and focuses on commercial finance instead.
CIT will still collect payments on its $11.6 billion of student loans, but it will stop making new ones, resulting in a pre-tax charge of $20 million. About $15 million of the charge will be recorded in the second quarter.
CIT may be looking to sell off the student loans still on its books, as it tries to shed assets outside its main businesses to help pay off the estimated $15 billion of debt it has maturing in 2008. About 95 percent of the loans in the portfolio are 97 percent guaranteed against default by the U.S. government.
CIT said on March 20 that it had drawn down its entire $7.3 billion of bank lines to raise cash to pay off debt. The secured and unsecured bond markets where CIT typically funds itself have become increasingly jittery, raising questions about how the company will fund itself. CIT shares have fallen 77 percent since June 2007.
Stopping student lending comes after CIT decided last year to stop making new mortgage loans, and focus instead on commercial finance. CIT still has about $9 billion of mortgages on its balance sheet.
CIT entered the student lending business in 2005 when it bought Student Loan Xpress, but in 2007 the business became increasingly difficult. Financing student loans by bundling them into bonds became materially more expensive as the asset-backed market seized up, and new federal laws cut into government default guarantees on student loans.
In an interview in July 2007, CIT CEO Jeff Peek said that if legislation then being considered made student lending less profitable, he would consider selling the business.
CIT generally tries to get at least a 15 percent return on equity from its businesses, Peek said at the time.
"If the student loan business wasn't returning at least 15 percent, and we didn't think we could fix it, we'd have to think of other options, and selling would be one of them," Peek said.