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 $1.34 trillion in Q2 2017, up from $1.31 trillion at the end of 2016, and now accounts for 10.4% of the $12.8 trillion in total household debt.

In Q2 2017, $3.3 billion in student loan asset-backed securities (SLABS) were issued, down 34% versus year ago. Of the total first half 2017 SLABS issuance of $7.9 billion, student loan refinance (refi) ABS issuances were $2.3 billion, a 30% increase versus year ago. Traditional private SLABS issuances accounted for $0.8 billion, a 54% decrease versus year ago.

Family Federal Education Loan Program (FFELP) ABS issuances in the first half of 2017 totaled $3.9 billion, a 14% increase versus year ago.

Performance and Practices

90+ day delinquencies rose to 11.2% in Q2, up from 11% in Q1, outpacing delinquency rates for credit cards, auto loans and mortgage loans. Annualized gross defaults for private SLABS were 2.5% in Q1 2017, up 9% versus year ago.

Allegations of improper servicing tactics at Navient, the nation’s largest student loan servicer, and improper and ineffective enforcement procedures by National Collegiate Student Loan Trusts, holders of over $12 billion in private student loan debt, echo the subprime mortgage crisis.

Looking Ahead

Investors will likely continue to show strong interest in refi SLABS as lenders offer borrowers with strong credit profiles the opportunity to take advantage of favorable interest rates.

Across the industry, however, if it is discovered through litigation against Navient or otherwise that servicers are failing to advise students of loan modification and deferral options or engaged in other improprieties, the public may find they are adding to the student loan debt crisis and increasing the risk of loss to investors. Further, if National Collegiate’s enforcement problems (e.g., failing to produce the necessary paperwork to enforce the loan) are a bellwether for the industry, losses will crystallize. ABS investors should start to ask the same tough questions a court would if the trust tried to enforce a note – are servicing procedures being properly carried out, can the trust demonstrate ownership of the note? If public sentiment shifts severely against the industry, reputational risk may become yet another investment factor.