Student Lending Analytics Blog

Fitch Ratings Cautions That Student Loan Trusts Under Pressure Due to Frozen Auction Rate Security Market

Fitch indicated in a press release that "The prolonged freeze on the auction-rate securities (ARS) market may begin to manifest itself in negative rating actions on U.S. student loan trusts that use ARS, according to Fitch Ratings in a new report."  The article notes that this is not a case of if. but rather when, these trusts will receive negative ratings action barring "some sort of remediation such as refinancing or restructuring."  This is more bad news for the securitization markets.  Fitch also cited that 35 of the 110 trusts they monitor have parity ratios (ratio of assets to liabilities) below 100. 

Letting Students Choose: The Direct Lending/FFELP Conundrum

A recent article in the Chronicle of Higher Education as well as posts on this blog indicate the recent market share gains that Direct Lending has made at the expense of FFELP.  The principal reason behind this shift was the dislocation that started earlier this year caused by the combination of subsidy cuts and the credit crunch which led many lenders to leave the market.  For those lenders that remained, there were three rounds of modifications to their loan terms leaving many financial aid administrators scrambling to assemble their lender lists.  Traditionally, schools have made the choice for students as to whether to participate in the FFEL program or to go the Direct Lending route. 

I wondered whether there were some schools that participate in both programs and let the students decide.  Armed with recent Department of Education data on Direct and FFELP participant volume, I came across these schools which either offer students a choice of the two loan programs or participate in different programs with different student populations (it would be great to hear from these schools as to how these arrangements are working out):

Market Buzz (September 30, 2008)

• Concerns about student loans grow given bailout's failure to pass House yesterday.  Loans are being emphasized by politicians eager to put a "Main Street" emphasis on bailout plan.   
  
  • TV station in Columbus, Ohio notes increased difficulty of finding private loans.
  • TV station in Raleigh, NC indicates Wachovia leaving private loan market.  
  • Crains Detroit describes how impact of credit crunch may be felt as early as January as students unable to find loans for second semester/quarter.  
  • Time Magazine reports on impact of credit crunch on student loans.  
  • Rochester, NY TV station reporting that student loans harder to get.  

Bailout Fails to Pass House; Stocks Drop Sharply with Dow Jones down 7%

Here are some of the reactions to the House vote against the bailout plan:

• Bloomberg article highlights other steps the Fed can take in light of the House rejection of the Paulson plan.  The New York Times also provides examples of tools available to Fed and Treasury. 
• Business Week article highlights the dislocations in the credit markets, which are every bit as volatile as the stock market.  
• San Jose Mercury News describes losses in technology stocks today.  
• Associated Press article indicates that House plans to reconvene on Thursday to discuss an amended bill (hmm, I am guessing they might want to meet sooner if the markets continue their meltdown).
• International Herald Tribune article notes how Asian markets have sold off after the House rejected the bailout plan earlier today.
• For those looking for a bit of comic relief, here is an interesting solution for financing the bailout proposal.  

So, what happens tomorrow (Tuesday)?  If there is one thing this crisis should teach us is this, expect the unexpected.  Who went to bed on Sunday night expecting the Paulson plan would go down to defeat in the House (other than those who voted against the bill)?  The President plans to speak before the market opens at 7:45am tomorrow and I expect the unexpected.  Maybe we will see a 50 bp interest rate cut from the Federal reserve, or other actions that the Treasury or the Fed can take without seeking Congressional approval.  The markets will need something to turn around this extremely bearish sentiment.  Interesting thought for the day; on a day when the House voted down a $700 billion bailout plan, the US stock markets lost approximately $1.2 trillion in value. 

Stay tuned....

Update:  President Bush spoke at 8:45 ET this morning.  According to WSJ, he said the economic damage will be "painful and lasting" unless the bailout bill is passed, and said the economy is depending on decisive action by the government. "For the financial security of every American, Congress must act," the president said.

For more information, see:
http://online.wsj.com/article/SB122277181408289865.html?mod=djemalert

Wachovia to Stop Originating Private Loans for Graduate Students as of October 1, 2008

Wachovia released the following letter to its clients this afternoon:

Dear Graduate and Professional School Partners,

We have made an important business decision that we will no longer be
accepting new applications for private graduate and professional loans
effective close of business on October 1, 2008.

Wachovia Banking Operations Acquired by Citigroup in Deal Brokered by FDIC

While Congress begins formal debate on the $700 Billion bailout plan, the banking landscape is being transformed before their eyes.  Another troubled bank, Wachovia, has seen their banking operations swallowed, this time by Citibank, in a deal structured to minimize insurance payouts made by the FDIC to depositors.  Wachovia shares which closed at $10.00 on Friday were quoted down 90% in pre-trade activity which ndicates a sale made under duress.  This news follows the seizure of Washington Mutual and its subsequent sale which occurred last week. 

The Reuters article notes the following about the arrangement struck between Citigroup and the FDIC:

Student Lending Analytics Announces their 2006 Default Prevention Honor Roll

SLA is pleased to recognize two-year and four-year public and private institutions with the lowest average cohort default rates over the past three years (2004-2006).  This analysis is based on cohort default data recently released by the Department of Education.  By analyzing default data over a three year time horizon, the SLA Honor Roll focuses on schools that have been able to perform at a consistently high level in minimizing student loan defaults.  

Here were the leaders in each of the school categories, with their average cohort default rate from 2004-2006 (drumroll please):

Are Student Loans "Troubled Assets"?

The discussion draft of the bailout bill is now available.  For those wondering if student loans are covered under the current plan, the answer is "maybe."  The definition of "troubled assets" to be purchased by the Treasury Department is defined as:

Spike in LIBOR To Significantly Raise Cost of Some Private Student Loans

The recent spike in LIBOR comes at a bad time for private student borrowers facing monthly or quarterly interest rate resets on their loans.  LIBOR, the interest rate that banks charge each other for loans, has risen dramatically as banks increasingly are unwilling to lend to one another given the turmoil in the credit markets. 

Student loan providers, such as Sallie Mae and SunTrust, set their private student loan pricing based on one-month LIBOR plus a margin (e.g., LIBOR + 8%).  For Sallie Mae, the largest private lender, these rates reset on a monthly basis based on the one-month LIBOR rate printed in the Wall Street Journal on the 25th of the month.  These rates are typically rounded up to the nearest 1/8 of a point.  On September 25th, the one month LIBOR stood at 3.70%, an increase of 121 basis points (1.21%) in just 10 days.   Rounding up to the nearest 1/8th of point would increase the index to 3.75%. 

Since the index is reset on a monthly basis, one can hope that implementation of a financial bailout plan will bring LIBOR back down when rates are reset again in October.  Of course, those fortunate to have student loans tied to the Prime Rate will see no change in their interest rate, as the Prime Rate has remained at 5% since April. 

Market Buzz (September 25, 2008)

• The cautionary tale of direct-to-consumer private loans...and why certifying these loans makes sense (how many more fraud cases are there?)

• Campus newspapers take on the credit crunch and its impact on availability of student loans