I was perusing through some 2007 private student loan trust prospectuses for another project that I was working on. So, what was life like before liquidity dried up and the credit crunch began almost two years ago? In NCSLT 2007-2, a private student loan trust structured by First Marblehead in June 2007, the weighted average interest rate of the portfolio was LIBOR + 5.13%. SLA estimates the average private student loan today has a starting interest rate of about 11% or LIBOR + 10.7% (several lenders have significantly increased their interest rates as posted here). So, the cost of a credit crunch and the lack of liquidity in the secondary markets is over 550bp (5.50%) when it comes to private student loans. Remember that this margin expansion has occured at the same time as lenders have increased their underwriting standards, both in terms of FICO scores and cosigner requirements. Where this margin expansion will be felt by borrowers will be when interest rates move up (which has occured recently in the bond markets) and the cost of their variable rate loan increases in lock-step.
A little thought experiment here; if average margins had remained at the LIBOR + 5.13% (as they were in the summer of 2007, the average private student loan would have a starting interest rate of around 5.5%!
Update: As one reader reminded me, I neglected to mention the other side of the equation, which is the reduced liquidity and increased funding costs that lenders face. While 2006-07 vintage student loan ABS deals were priced to yield several basis points over LIBOR, the most recent Sallie Mae private loan ABS deal (2009-2) in May of 2009 had a coupon of LIBOR + 600bp (if called by 2011, cost of financing would be LIBOR + 366bp). However, Sallie Mae is using brokered CDs sold through the Sallie Mae bank at LIBOR + 2% as a principal capital source to fund their private loans today.
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