Student Lending Analytics Blog

Warning Label On Private Loan Calculators

After reading another product announcement about a lender launching a "new and improved" loan calculator for their private student loan product, I thought I would take a look hoping (yes I am an eternal optimist) that "new and improved" might include better disclosure of the variable rate nature of these loans.  But alas, while there was mention that this loan was variable and the rate would change as the underlying index changed, it was in the fine print. 

So, how would I do it?  After the student ran the calculations before they could get to the results, I would have these sentences flash on the screen:

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. 

Where's The Champion?

At least one reader (Paul Combe of ASA) found yesterday's news interesting in that headlines surrounding rising cohort default rates appeared on the same day that Treasury and Education announced an effort to Increase the financial capabilities of our citizens which led him to ask the question:  Where's the champion? 

Three Perspectives On Cohort Default Rates

The Department of Education's release of 3-year cohort default rates (CDR) has led to a frenzy of analysis (something about a spreadsheet with 5,000 rows and 12 columns of data that is just asking to be analyzed).  Here were a few that readers brought to my attention:

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:

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: