WSJ: Student Loan Default Rates Are Soaring

Not much new in this story today, except for forbearance policies at for major private lenders.  The story cites the following evidence for the headline, all of which have been cited on this blog previously (see links below):

• Default rates on federal student loans rose from 6.9% for the 2007 cohort vs. 5.2% in 2006, according to the Department of Education.  
• Sallie Mae's overall private loan writeoffs have increased to 3.4% in 2008 from half that level two years ago.  
  • In their 4Q conference call in January 2009, Sallie Mae indicated that private loan write-offs could hit $1 billion in 2009 and also seeing "acceleration [in delinquencies] beyond what they were expecting."
• Citibank's Student Loan Corporation was also cited as seeing their private loan write-offs grow from 1.5% in 2007 to 2.8% in 2008. 
  
  • Here is their 4Q earnings announcement which provided evidence of deteriorating credit quality.

In thinking about the delinquency and default trends in private loans, two data points tell me that things will get worse before they get better:

• Easy credit prior to 2007 led to risky student loans being underwritten by many lenders.  Take a look at what Sallie Mae calls their non-traditional private loan portfolio for evidence of this (14% of their private loan portfolio but over half of chargeoffs).  Since most student loans enjoy deferral of loan payments until six months after a student graduates, I would expect there to be a lag before these bad loans start showing up as defaults.  
• The worsening unemployment picture has led to record levels of unemployment among college graduates, which now stands at 4.3%, double where it stood a year ago.  The economy has shed over 600,000 jobs in each of past five months.  

Here are the forbearance policies at four major lenders, according to the WSJ article:

Sallie Mae. The lending giant, which makes both federally backed and private loans, says it grants private borrowers forbearances in increments of up to three months, and may be extended several times, typically up to a total of 24 months. There's a forbearance fee of $50 per loan, up to a maximum of $150. Another option may be to extend the repayment period by several years, which in turn lessens monthly payments, though the minimum balance must be at least $20,000.

• The article did not cite the fact the SLM has instituted a policy of reducing the number of borrowers in forbearance:
  • From 4Q earnings announcement:  "Managed Private Education Loans in forbearance as a percentage of loans in repayment and forbearance decreased from 11.5 percent as of September 30, 2008 to 7.0 percent at December 31, 2008. On a year-over-year basis, overall delinquencies increased from 8.3 percent to 10.2 percent while loans in forbearance decreased from 13.9 percent to 7.0 percent."

Key Corp [Note:  Key Bank suspended their private loan program in 2008]. Key says it grants forbearances in six-month increments, with conditions depending on individual circumstances. For instance, someone struggling with a job loss may have greater need than someone else whose pay was cut. While some borrowers may qualify for a full forbearance, others may qualify only for reduced payments. Either way, Key says it doesn't charge any additional fees.

Student Loan Corp. Borrowers in trouble can make interest-only payments for a period of either two or four years. They might also qualify for a forbearance, generally up to a maximum of 12 months. There are no fees for either option.

Wells Fargo. Borrowers can apply for forbearance, granted "generally in cases of extreme financial hardship," a spokeswoman says. There are no fees, and length of time is based on individual circumstances.

With Sallie Mae and Student Loan Corporation reporting 1Q earnings shortly, we should have more data points on trends in private loan defaults and delinquency trends.  I don't suspect we will be hearing any good news on this front for several quarters.