Student Lending Analytics Blog

Alternative Loans: Impact of Shopping Around on Your Credit Score

A recent New York Times article has some interesting insights into the ongoing debate over what the impact of shopping for alternative loans can have on your credit score.  Here are the highlights:

• Fair Isaac, the firm that helps credit bureaus (Experian, Trans Union and Equifax) calculate credit scores treat student loans differently from mortgages or auto loans.  While they allow comparison shopping for the latter two loan types without dinging credit scores, they do not accord the same treatment to student loans.

Sallie Mae 2Q 2008 Conference Call Highlights

Sallie Mae (SLM) reported "core" earnings for the 2Q of 2008 which were down by 72% as compared to 2Q 2007. 

Here are some excerpts from the transcript of their conference call, which is provided by Seeking Alpha:

Securitization of FFELP assets increased in 2Q vs. 1Q but funding costs remain high:
"Through the first six months of 2008, we issued $11.8 billion in term FFELP asset backed securities, including $7.1 billion in the second quarter. The all in cost of this issuance in the quarter was 140 basis points over LIBOR...Since the close of the quarter, we securitized an additional $1.6 billion at an all in cost of 85 basis points over LIBOR."

SLM plans to take advantage of Department of Education Liquidity Plan to reduce reliance on securitization market:

New FAFSA Filings Jump 20.2% In First 6 Months of 2008

New FAFSAs received by schools in first six months of 2008 increased by 20.2% to 8.45 million from 7.03 million for the same period of 2007, according to data recently released by the Department of Education.  This figure includes only original FAFSAs received by schools through electronic, paper or web-based methods and excludes FAFSA renewals.  The percentage of FAFSAs received by schools from students via the web increased to 95.0% in 2008 from 87.0% in 2007. 

The increase in FAFSA filings would appear to be driven by several factors:

Read the Fine Print on Alternative Loans: It Could Save You $1,500!

While recently shopping for alternative loans for my nephew who begins school this fall, I had the opportunity to review promissory notes from several different lenders.  According to Wikipedia, a promissory note "is a contract detailing the terms of a promise by one party (the maker) to pay a sum of money to the other (the payee). The obligation may arise from the repayment of a loan or from another form of debt."

Yes, I know, these documents can run into the dozens of pages or are written in such small fonts that you might need a magnifying glass to read it.  However, buried within this document are the key elements of your student loan, including the amount to be repaid, the interest rate, fees and repayment terms. 

PLEASE, PLEASE, PLEASE read the section in the Promissory Note that pertains to Interest Capitalization (it may also be described as how interest will accrue during the loan term) as it can save you $$$.  This section refers to how interest accumulates on your loan while you are in school, should you choose not to make payments (defer payments) until you graduate or leave your academic program.   

State of the Industry: Analysis of NASFAA Exhibitors

Given the tumult in the student loan marketplace, I thought it would be interesting to analyze how the base of exhibitors have changed at the annual NASFAA conference, which recently took place in Orlando, Florida from July 6-9, 2008.  In reviewing exhibitors listed in the 2007 and 2008 Programs, there are some interesting insights: 

• The number of companies exhibiting at the conference declined by 11.1% from 90 in 2007 to 80 in 2008.  Given the large number of lenders that suspended operations in the wake of the combination of subsidy cuts in CCRA and the "credit crunch", this decline is certainly not unexpected. 

Defaults Rising for Private Loans: Analysis of First Marblehead Securitization

With mounting concerns regarding defaults on student loans, I thought it would be interesting to review some seasoned loan data to see what the trends were.  Going to First Marblehead's ABS web site, I analyzed their The National Collegiate Student Loan Trust 2003-1.  This trust holds a portfolio of student loans amounting to $687.5 million.  It is a relatively seasoned portfolio with over 97.5% of loans in repayment as of their latest 4/30/08 reporting period.  The following table indicates how defaults have risen on this portfolio over the last two years (please note that defaults are measured as a percentage of loans in repayment):

Reporting period            Default Rate
10/31/2006                          5.67% 
1/31/2007                            6.22%
4/30/2007                            7.06%
7/30/2007                            7.69%
10/31/2007                          8.74%
1/31/2008                            8.94%
4/30/2008                            9.21%

These rising default rates have made investors skittish about private loans which has effectively shut down the securitization market for these loan types.  The April 30, 2008 report also indicated that forbearances stood at 13.4% of loans in repayment, up from 9.9% in the January 31, 2008.  A forbearance is a period of time during repayment in which the borrower is granted permission to temporarily postpone making regular monthly payments. This is often an early harbinger of defaults to come. 

Debunking the Myths of Student Lender Lists and the RFI Process

While the student lending industry has undergone dramatic change over the last year, many commonly held myths regarding student lender lists persist. 

Myth #1: There are no savings opportunities available to my students for the 2008-09 academic year since lenders have eliminated all borrower benefits.

Reality: First, as of today, there are still two lenders offering borrower benefits beyond the 0.25% interest rate reduction for automated electronic payments.

Market Buzz (7/7/08)

I am attending the NASFAA conference in Orlando this week.  Here are some recent headlines that I thought were worth noting:

Lenders having trouble finding bridge financing necessary to participate in Dept. of Ed. liquidity plan       

• The bridge financing issue was one raised after listening to the Dept. of Education webinar where a number of lenders requested information about banks who could provide them with warehousing facilities or lines of credit to bridge their first disbursements. 

MRU Holdings completes $140 million securitization at cost of funds of 3 mo. LIBOR + 4.60%

• The MRU securitization and accompanying investor presentation is interesting for several reasons:
  
  • First private loan securitization from finance company in 9 months
  • Demonstrates how the cost of funds have risen to get such a deal completed
  • To compensate for this higher cost of funds, MRU indicated that they expect weighted average interest rates for loans of 3 month LIBOR + 9% (currently equivalent to 11.8% APR).
    
    • Presentation indicates that "MRU believes that this pricing is consistent with that of its competitors, who similarly have had to adjust for increased cost of funds..."

Interviews
Vermont Student Assistance Corporation, Don Vickers

New York State Agency Developing Alternative Loan Comparison Product

While researching school financial aid websites, SLA noticed a interesting disclosure on the SUNY-Oswego financial aid website.  It indicated that the New York Higher Education Services Corporation (HESC) is developing a service that will allow students "to compare private loans on one site with one credit check."  The site indicated that the service would hopefully be available "by mid-July."

The NY HESC website describes their Student Loan Marketplace as the "the first Web site in the nation to provide alternative loan comparisons and real loan terms with just one credit check."   

Borrower Benefits: And Then There Were Two....

July 1st typically marks the unofficial opening of the student lending season.  The past few weeks have seen many lenders scale back their borrower benefits to ensure that their loans are compliant with the Department of Education loan purchasing program.  This was explained in an electronic announcement from the Department of Education and later finalized in the Notice placed in the Federal Register on July 1, 2008.

As stated in the electronic announcement, in order for a loan to be eligible for the Dept.'s loan purchase program, one of the requirements is that the "loan carry no committed or implied borrower benefit other than the two benefit programs noted above or those which are expressly provided for in the statute or in the promissory note."

Those two benefits being referred to are:

• Upfront borrower benefits such as origination and default fee waivers.

• Reduction of 0.25% (one-quarter of one percent) in the loan's interest rate if the borrower elects to have his or her monthly payments paid automatically through an electronic debit process.

So, who are these two lenders currently offering Stafford borrower benefits beyond the minimums?