Student Lending Analytics Blog

Comparing Borrower Demographics And Default Rates

Once every few weeks, I am crunching some data where I expect a certain result and then when I finish the analysis, I have one of those AHA! moments.  Such was the case earlier today.  Bizzaro Watchdog's comment on one of my recent posts led me to dig deeper on the issue he raised : "To truly compare default performance, one has to isolate for the borrower demographics and only then compare across all institutions." 

While I didn't have borrower demographic information, I did have a proxy for income by analyzing Pell Grant recipients as a percentage of students enrolled.  And as luck would have it, when the Dept. of Education recently released their 3-year cohort default data they also provided enrollment data for all of the Title IV schools too.  When I analyzed the figures, here is what I got for the 2007 cohort:

What Does The Repricing of Student Loan Risk Feel Like On Main Street?

I have a slide in a presentation on private student loans which shows how interest rate margins have changed over the past 2 years by 400-500bp, having been LIBOR + 5% or so in 2007 to about LIBOR + 9% to 9.5% today.  Based on the case study described below, it appears that this dramatic repricing of risk occured in the fall of 2008 for at least one lender. 

One morning, I checked my email to see this message from a student: 

"My interest rate rose from 4.25% to 11.625%. I chose to pay for my interest while in school, but with this new rate that will be impossible."

Discover Grows Federal Loan Business By $1.1 Billion and Private Loans By Almost $500 Million In Last Year

To provide some context, in last year's 4Q conference call, Discover's student loan product was mentioned all of once..."Our total loan portfolio grew 6% year-over-year to $51 billion with Discover personal loans and Discover student loans contributing about 2% points to that growth."  Now with credit card loans declining, student loan growth have helped to offset some of this decline: 

Before diving into the conference call, I thought I would wade into their supplement to their earnings call (Oh no!  I am having flashbacks to my time as an investment analyst and creating those earnings models!).  The supplement shows how their guaranteed student loan business grew by over $1 billion and private loans by almost $500 million in the past twelve months (or about a 5% share in an $11 billion private loan market).  Figures shown below are loan balances at quarter end expressed in thousands of dollars):  

Participate In SLA Flash Survey On Private Loan Lender Lists!

The survey was sent out to financial aid professionals earlier today and will close on Friday afternoon at 5pm.  The survey focuses on how schools are thinking about their private loan lender selection process for 2010-11, and also inquires about the availability of private loans on college campuses. 

If you did not receive a copy of the survey and would like to participate, please feel free to send me an email at tranzetta@studentlendinganalytics.com. 

What Causes Student Loan Defaults?: A Research Report

Thanks to Mark Scanlan for pointing me towards a 2002 study authored by Jennie Woo (whose recent post appeared earlier this week) with the title "Clearing Accounts:  The Causes of Student Loan Default."  Here were Mark's comments on the study and its implications given the current changes in the federal loan program:

"One of its insights is particularly relevant to today's environment: the impact of split servicing, the condition in which a borrower's loans are serviced by more than one entity. Dr. Woo concluded that this condition increased the likelihood of default by 22%. For years, lenders, guarantors, and secondary market holders took pains to try to serialize a borrower's loans to one servicer, and a single servicer was the norm for most borrowers. With ECASLA purchases and the transition to DL, split servicing will affect the approximately 50% of borrowers whose loans are not currently serviced by Sallie, Nelnet, AES, or Great Lakes."

Please send along any other studies that you might be aware of on this topic.  It would certainly seem a good investment to update this study to inform policymakers as to the causes of student loan defaults, given their accelerating growth. 

First It Was "Guaranteed", Now It's A Promise: One State's Prepaid Tuition Products

They started with a Guaranteed Tuition Plan and now have a Tuition Promise Plan (see this post for comprehensive list and inherent weaknesses of many prepaid tuition plans:

Thinking About The ROI For That College Degree at State U.?

I probably should have seen this earlier, but the Payscale College Salary Report provides data on salary ranges by major at leading universities.  For example, here are the top 10 state universities based on salary potential with mid-career being defined as 15 years out:

Take The National Financial Capability Challenge...

Treasury and Education announced a joint partnership today (click here for press release) to promote stronger financial capability among the nation's youth.  Get used to the term "financial capability" replacing "financial literacy" in our lexicon.  The first step in this effort was the announcement of the National Financial Capability Challenge, a test to be administered in the spring of 2010:

One Word To Describe U.S. National Financial Capability Study: "Unsettling"

"This study has given us a wealth of important—and in some cases, unsettling—data that we can use to help Americans better manage their finances and plan for their futures."

Rick Ketchum, Chairman and CEO, FINRA prepared remarks delivered on December 15, 2009

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Skimming through the National Financial Capability Study released today by FINRA Investor Education Foundation.  I like the fact that it is taking a more expansive view on the issue which shows in the title of the study.  Those who created this survey see financial literacy as only one component of financial capability.  I like the multi-dimensional approach they seem to be taking to this issue, rather than just focusing on specific knowledge:

"Financial capability cannot be measured simply by looking at one indicator, such as demonstrated knowledge of specific terms or concepts. Instead, financial capability encompasses multiple aspects of behavior relating to how individuals manage their resources and how they make financial decisions (including the factors they consider and the skill sets they use). It is a multi-dimensional concept that requires looking at individual behavior from various angles."

H.R. 4173 Includes Amendment Requiring School Certification Of Private Loans

The amendment to H.R. 4173 Wall Street Reform and Consumer Protection Act of 2009 authored by Rep. Polis (Colorado), Rep. Bishop (New York) and Rep. Murphy (Pennsylvania) would require schools to certify the following information regarding private student loan borrowers: