Student Loans: 60-Second Market Review and Insights

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.