Student Lending Analytics Blog

A House of Horrors: Student Loan Default

Mark Kantrowitz of FinAid's "The Horrors of Defaulting on Education Debt" is a must read for policymakers and student borrowers alike.  In fact, this should be included as part of entrance and exit counseling so students understand the obligations they have once they have signed on the dotted line (and what can go wrong if they don't). 

Here are just two of the situations that Mark describes (titles are from the report):

DBRS Report Notes 66% Jump in Private Loan Defaults In 3Q

Here is their executive summary of the DBRS 3Q Private Student Loan Report, which tracks the performance of private student loan collateral backing 39 trusts:

The weak job market [SLA note:  See post on weak employment numbers and defaults] and slow economic recovery continue to plague the private student loan ABS market. In the third quarter of 2009, performance of the private student loan collateral backing the 39 trusts that comprise the DBRS Private Student Loan Indices continued to deteriorate at a steady pace. Quarterly defaults spiked to record highs, while cumulative defaults continued to rise towards unexpected levels. Forbearance rates remained historically low [SLA note: Since SLM trusts make up over 50% of the index, their strategy over the last year of reducing forbearances has had a dramatic effect on the overall index] and delinquencies remained elevated.

On Unemployment and Private Student Loan Defaults

In case you missed the morning announcement from the US Bureau of Labor Statistics, the unemployment rate has now sits above 10% (10.2% to be precise) and the total number of jobs now lost since December 2007 is over 8 million.  This article from the blog Minyanville captures the loss of white-collar jobs that has occurred during this recession:

"The months since the collapse of Lehman Brothers have been disastrous for professionals, except those in the fields of health care and education. From August to April, there was an overall drop in employment of 4.3%. More significant, however, were the steep declines in highly skilled occupations: 9.3% in computer and math jobs, 10.3% in engineering and architecture occupations, and a whopping 11.5% in arts, design, entertainment, sports, and media occupations."

To get a sense of how bad it has been for recent graduates, here is what one expert had to say:

Servicing on Student Loan Xpress Loans Not Expected To Be Impacted by CIT Bankruptcy Filing

In case you get questions from recent Student Loan Xpress borrowers...

Here is the announcement from Fitch today:

"Fitch spoke with XLS regarding the potential implications of the CIT bankruptcy filing to XLS' operations and its capacity as servicer of the above mentioned transactions. XLS stated that it is 'business as usual' and that they continue to fill open positions as turnover occurs. Fitch believes that if XLS becomes part of the bankruptcy proceedings, a bankruptcy judge would consider the servicing operations necessary to protect trust assets and the total value of the estate. Therefore, the servicing operations would be maintained and expenses, including payroll, would continue to be funded. Additionally, the servicing platform itself is an asset and could be acquired by a third-party in a bankruptcy proceeding."

Citi CEO Pandit Talks Student Loans...

Here is interview with Citi CEO Vikram Pandit and the Editorial Board of the Argus Leader on Sunday.  Two takeaways: 1)  Since Citi's Student Loan Corporation will need to continue servicing existing federal loans there won't be major changes with their Sioux Falls servicing operations and 2) Pandit didn't seem to have received the talking points about the Student Loan Community proposal as he seemed resigned to the fact that loan originations were going away.  Also, Pandit neglected to mention that the Citi was left on the outside of the big enchilada, the DL servicing contract, which will be split among Sallie Mae, AES/PHEAA, Great Lakes and Nelnet.  As a result, their servicing business will be in run-off mode, should FFELP be eliminated. 

Here is the interview questions and answers:

Sallie Mae and the State of Student Loan Markets

Interesting commentary from the Sallie Mae conference call today.  Here is a link to the Seeking Alpha transcript of the call.  SLM stock price shot up over 20% based on strong earnings guidance of $1.50 for 2010 and hopes that credit losses in their private loan portfolio have peaked. 

Here are the highlights from the call:

• Described how lending "bubble" from 2004-2007 led to "extremely high" charge-offs in private loan portfolio in 2009: 

"Also we had extremely high credit losses that with something like $443 million of charge-offs. Those charge-offs obviously relate to general economic conditions. Even maybe more precisely what I would call a bad lending bubble that occurred from 2004-2007 timeframe which we refer to and as you’ll hear referred to later as non-traditional lending. That has been totally discontinued as I’m sure you know."

Are New DL Servicers Required To Perform Default Prevention/Aversion Activities?

There seems to be some confusion.  From Sallie Mae conference call today (thank you Seeking Alpha for the transcript):

"These are people who are doing origination work, debt counseling, financial aid awareness and most importantly default prevention that are not covered for under the direct lending program."

From Great Lakes contract, which is the standard contract for all four servicers (AES/PHEAA, Nelnet and Sallie Mae also) (see page 38): 

"The servicer shall have the ability to perform collection and due diligence activities "as required by legislation and/or regulations."  Servicers will be required to provide collection and default aversion activity on loans serviced under this contract as long as the loan remains on the servicer’s system. If a borrower reaches the 360 days delinquent, the servicer will be required to transfer the loan to the DMCS." [bold print is provided for emphasis by SLA]

For the sake of borrowers, I hope someone figures out who is responsible for this important activity of default aversion/prevention!

For those wondering if default aversion and default prevention are referring to the same thing.  This link to a description on the USA Funds website indicates that default aversion activities are carried out by default prevention counselors. 

Time For A Rethink on Forbearance

Jack Remondi, Vice-Chair and CFO of Sallie Mae, describing how they think about forbearance on private student loans:

"I would describe the forbearance practice change, as being one of, more automatic eligibility for forbearance to match what went on in the FFELP program, so that borrowers and schools understood the consistency there, to one of more analytics.  Borrowers have to demonstrate to us that they can actually benefit from a forbearance before it is granted.  Putting someone into a forbearance mode and capitalizing the interest when they cannot afford the monthly payment because they either dropped out of school or borrowed too much, that doesn't make any sense.   Loan modification for that borrower is a far better tool to manage that.  If 10% of borrowers qualified for a forbearance that they could benefit from it, we wouldn't have a problem granting them a forbearance, it's just  don' t want to give it to people who can't benefit from it."

Sallie Mae's Private Student Loan Originations Fall 57% in Quarter; Charge-Offs Continue Rise

The incredible shrinking private student loan market continues to contract.  Sallie Mae released third quarter earnings today and noted that:

"During the quarter, the company originated $893 million in private education loans, a significant but not unexpected decrease from the year-ago quarter’s $2.1 billion. The decrease is principally due to tightened underwriting standards and reduced demand caused by increased federal student loan limits."

Do Default Aversion Activities Translate Into Long-Term Borrower Success?

I was reading through the news of the day and came across this press release from USA Funds with the headline "USA Funds Prevents $23.7 Billion in Defaults."  Here was the lead paragraph:

"USA Funds®, the nation's leading education loan guarantor, reports that it prevented $23.7 billion in defaults on more than 1.5 million past-due federal student loan accounts during the fiscal year ending Sept. 30. USA Funds' default prevention efforts were successful in averting default on more than 93 percent of loan accounts on which payments were reported by the lender as being 60 days or more past due."