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

College students – prepare to be educated on a new case of Hobson’s choice, a term typically used to describe situations where there appears to be a choice available, but in reality, there is no choice at all.  It’s named after a stable owner in England who rented out horses, but would only offer customers the horse nearest the stable door.  But this time around, the concept is reflected in a proposed bill that would offer student loan borrowers debt elimination in exchange for delaying their Social Security qualifying age.  Whether they take the deal or continue to repay their loans in full, many student loan borrowers are being asked to sacrifice future economic security as a consequence of pursuing higher education.   Fortunately, some cities, states and universities have a better idea.

A Creative Proposal, But Not What it Seems

The proposal involving Social Security is included in a bill proposed by Rep. Tom Garrett of Virginia that would grant “$550 in student-loan forgiveness for each month a debtor was willing to raise his full retirement age, or $6,600 per year.”  The program would max out loan forgiveness at $40,150, which would result in a benefits delay of six years and one month.  But given that saving for retirement is already challenging for many millennials (putting aside, for the moment, whether Social Security will even be around for them to rely on or not), the notion that they should delay retirement benefits to lighten their load now, would do nothing to brighten their economic prospects.  In other words, there is nothing here to see but the illusion of choice.

It’s a creative idea intended to assist student loan borrowers, but if it does not address the root of the problem, it cannot create lasting change. Neither will revisions in the law that the Trump administration is considering to make it easier for student loan debtors to obtain relief in bankruptcy.  In both cases, “relief” would come with unwanted side effects – whether it be a mortgaged future or the stigma of bankruptcy – and investors lose a measure of predictability in loan performance.  No one wins.

There Has to be a Better Way

Regardless of the professional field chosen, the cost of a four-year university education is staggering.  Education costs have skyrocketed over the past 30 years – a rise of nearly 400% in tuition alone, in fact. And, even though increases in the already high tuition and fees have slowed down in the past few years, student aid has not kept up.  Contributing to the problems is that universities appear to be in an “arms race” with each other, increasing spending on “consumption amenities.”  Further, the true cost of an education at an institution may not be the “list price,” and can be obscured by discounts and aid available to some, but not an option for all students.

Given these trends, perhaps relief without the side effects would best come from re-pricing and re-prioritizing at the source of the costs – the schools themselves – or investing in students as reward for their taking on debt to better themselves and become productive members of the workforce.

And, In Fact, There Is . . .

Fortunately, there is movement on both fronts. Cities such as Memphis, Tennessee and Hamilton, Ohio and states such as Kansas with “rural opportunity zones” and Alaska and California with programs focused on healthcare workers are offering debt assistance or student loan repayment options that, under certain circumstances, come to their locales to work and live.

Most courageously, a few universities in 2017 made major tuition reductions.  La Salle University in particular has decided to roll back its tuition to 2008 levels, resulting in a 29% reduction from its 2016 levels.  La Salle’s website contains a detailed Q&A section describing the reasons for the rollback in compelling fashion.

Consider the gauntlet thrown.  It now lays at the feet of the nation’s other universities and colleges, waiting to be picked up.  If they don’t accept the challenge, prospective students may soon have a question for the school of their choice:  If La Salle can articulate the problem so clearly and take bold action, why can’t they do the same?

 

James Serritella, a partner in the Insolvency, Creditors’ Rights & Financial Products Practice Group of Davis & Gilbert, contributed to this post.