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

Originations and Issuances, by the Numbers

Student loan debt rose to $1.52 trillion in Q1 2018, up from $1.44 trillion a year earlier, and now accounts for 10.7% of the $13.21 trillion in total household debt, based on Federal Reserve Board of Governors and Federal Reserve Bank of New York data.

According to a report issued by DBRS, $16.7 billion in student loan asset-backed securities (SLABS) were issued in 2017, up 10% versus a year ago. Of the total 2017 SLABS issuance, student loan refinance (refi) ABS issuances were $5.2 billion, an increase of over 30% from 2016. Traditional private SLABS issuances accounted for $2.5 billion, a 14% decrease compared with a year ago. Family Federal Education Loan Program (FFELP) ABS issuances totaled $8.1 billion, a 22% increase from the previous year.

Performance and Practices

90+ day delinquencies fell to 10.7% in Q1 2018, down from 11% in Q4 2017 – the lowest level since 2012, but still exceeding delinquency rates for credit cards, auto loans and mortgage loans. In the refi sector, 60+ day delinquencies in Q1 remained low at 0.09%, in contrast to 2.85% for private student loans and 7.09% for FFELP loans, according to DBRS. Hurricanes Harvey and Irma caused a temporary spike in forbearances during Q3 and Q4 2017, but levels had normalized by the end of the year.

The overall fall in delinquencies has been attributed to low unemployment rates, but it also reflects that more borrowers are utilizing postponement options such as forbearance and income-driven repayment plans. As a result, stated delinquency rates may be misleading and may not accurately reflect true delinquency levels, which could be up to twice as high, as noted in the Federal Reserve Bank of New York’s quarterly report. It is estimated that 20% of borrowers are late on their student loan payments, and 2016 graduates left college with average debt of $28,400, which is almost 30% more than in 2001.

Looking Ahead

With unemployment trending lower, demand for SLABS is likely to remain high and securitization issuance is expected to grow at a steady rate. In particular, refi loans are increasing their share of the market and the sector will likely continue to attract significant interest from investors, due to strong borrower credit profiles and better-than-expected performance.

In other developments, talks of restructuring at the CFPB and plans to remove the agency’s student loan office may endanger its lawsuit against Navient. Going forward, the bureau’s power to supervise and take action against student loan servicers may be limited, and the CFPB is facing pressure to withdraw its case. With federal protections being dismantled, States are stepping in and pushing forward consumer protection laws, but have been urged by the Department of Education not to interfere on grounds of federal preemption, as we noted in our Law360 article. While investors are, for the moment, protected by adequate levels of credit enhancement in deals, borrower protections are under threat and these risks may ultimately be passed on to the secondary market. Investors should also be mindful that stated delinquency rates may not be painting an accurate picture of the market and may be masking the true extent to which borrowers are falling behind on their student loan payments.