Student Loan Risk Assessment

How are the changing economic, political and consumer environments affecting student loan asset backed securities?

Evolving sentiment toward the rising cost of higher education and growing student loan debt balance is resulting in new market opportunities and challenges. The charts provide instruction on how industry practices and other factors are impacting risks for lenders and investors.

Risk Level

As of Sept 2018

HIGH MED LOW 2012201320142015201620172018
The Student Loan Risk Assessment shows the risk of battles over loss allocation.

LOW RISK

HIGH RISK

Lending Practices and Factorsi

Private lending and refi’s have benefited from stringent underwriting, but competition could lead to looser underwriting; deferments and forbearances are skewing delinquency rates; latent risks exist, such as loans for unaccredited programs and for-profit schools.

LOW RISK

HIGH RISK

ABS Practices and Factorsi

Private and Refi deals continue to benefit from pools of higher quality loans; FFELP deals should continue to benefit from the government guarantee.

LOW RISK

HIGH RISK

Underlying Market Risksi

Education costs, the average student loan debt burden and the aggregate student loan balance all continue to climb, spurring debt-relief programs, proposed legislation and bankruptcy reform, and a growing body of borrower-friendly decisions.

current Status

Last week, Joseph Cioffi was a featured speaker at the iiBig 10th Annual Education Finance & Loan Symposium in Alexandria, Virginia.  He participated in a panel regarding the latest trends and issues impacting collections and also moderated a panel on valuation and trends in student loan securitizations.  Below, he shares key takeaways from the conference and shares insights from his fellow panelists.

The conference was highly informative, including the insights of the experts on the valuation panel: Rosemary Kelley, Senior Managing Director at Kroll Bond Rating Agency; Jonathan Riber, Senior Vice President at DBRS; and Mark Weadick, Managing Director at SL Capital Strategies LLC.

As the panel discussed at the conference, the best path to understanding student loan securitization is through comparison to other secondary market choices and other credit markets, such as those for auto and marketplace lending.

Mark Weadick advised attendees of the many funding and liquidity alternatives for originators of student loans, and explained the trends affecting various segments of the market and why they favor one approach versus another.  Mark concluded by noting that the securitization market is “robust” and valuations are high.

Jonathan Riber concurred; noting that origination volumes are strong, most notably in the refinance sector, with recent transactions being oversubscribed by 2-5 times. Jonathan also discussed DBRS’s experience in student loan marketplace lending and the specific challenges of rating deals from online lenders, including lack of historical data versus traditional or legacy student loan lenders.

Rosemary Kelley noted that despite the differences in rating deals in the education loan space, it’s still lending at its core, so a key factor is the creditworthiness of the borrowers and their ability to repay their loans.  But, Rosemary also noted, there are some differences from other markets specific to student loans that require attention.  For instance, there is a longer feedback loop on repayment from student borrowers given that repayment doesn’t begin until after graduation.

Rosemary and Jonathan agreed that the age of the lender, the amount of experience of its management personnel in the industry and whether the lender has survived a recession are significant ratings considerations.  Mark advised that beyond ratings, investor considerations must include the ever expanding universe of potential debt relief programs and potential action by the current administration on loan and deal performance.

Overall, the panel provided industry participants with an in-depth review of the state of the securitization market and other secondary market choices.  If you’d like to learn more about the panelists and the services they offer, please visit the websites below.

Kroll Bond Rating Agency

DBRS

SL Capital Strategies