The Consumer Financial Protection Bureau (CFPB) published its report on the state of private student lending today. The report showed that loans in the sector are increasingly being underwritten to stricter criteria that benefits both lenders and borrowers.
Over the last decade, the rapid increase in private student lending was mainly fueled by investor appetite for ABS. Securitization helped the financial institution private student loan market grow to over $20 billion in 2008 from less than $5 billion in 2001 before contracting to less than $6 billion in 2011.
During the boom, from 2005 – 2007, underwriting criteria loosened and the percentage of loans made to undergraduates without certification of need grew to over 70% from 40%. Lenders were also originating loans to borrowers with lower credit scores than they had previously been.
Since 2008, lenders have changed their underwriting and marketing practices. The report highlights several of the growing trends in the space that have improved loan origination quality since 2008. For example, the proportion of loans that are co-signed has increased to 90% in 2011, compared to 55% in 2005.
Tom Deutsch, the executive director of the American Securitization Forum (ASF), said in a press release today that the securitization industry is working toward implementing a greater culture of transparency to private student lending. The ASF and its members worked with Congress to pass the Higher Education Opportunity Act in 2008 which also significantly improved disclosure standards giving student borrowers a far better understanding of the terms of their loans.
"It should also be noted that private student loans have never been intended to be a substitute for federal aid, indeed, they are meant to serve as a bridge between available federal money and the ever-escalating cost of higher education,” said Deutsch.
The Education Finance Council, which also commented on the report in a separate press release, said that the report has also proved that "not all private student loans are bad. "
The CFPB report showed that loan programs offered by nonprofit and state agency student lenders "are good options to consider for borrowers that need additional financing to meet the costs of college. "
According to the report, state program providers loans are distinguished from for-profit lenders in a number of ways, including lower, fixed rates derived from tax-advantaged bond funding, lack of risk-based pricing, substantial financial counseling before and after borrowing, and 100% school certification. Default rates for non-profit state-affiliated lenders were also found to be approximately half that of their for-profit market counterparts.”
The report is based on data from nine lenders on over more than five million loans made between 2005 and 2011, as well as data from five nonprofit lenders. It was required under a sweeping overhaul of financial rules passed by Congress in 2010.