Direct-to-consumer (DTC) loans carry a higher risk of borrowed funds not being used for education as well as excessive or unnecessarily expensive debt and as a result could face higher loan default rates and losses than those of more traditional school loans, Moody’s Investors Service reported.DTC loans have constituted a significant portion of transactions sold by issuers of securities backed by pools of private student loans over the past five years.But DTC loans are disbursed directly to the student borrower and/or co-signer, and unlike the more traditional school channel loans, are not school certified regarding enrollment status and the loan amount or marketed through school financial aid offices.Moody’s said DTC loan defaults and delinquencies reflect their weaker credit quality and performance across all issuers who had both types of loans in their securitizations, despite varying results across issuers.Sallie Mae’s DTC loan expected lifetime default rate is 1.3 times that of their school channel loans, and First Marblehead’s DTC loan rate is 2.9 times that of school channel loans, according to Moody’s.School channel loans depend on the assurance that borrowed funds will be used for education whereas two key safeguards of school channel loans limit the ability of a student to incur more debt than necessary, Moody’s said.First, schools provide lenders with certification before disbursement of funds that typically includes verification of borrower enrollment status, grade level, anticipated graduation date and authorized loan amount. Second, funds are disbursed directly to the schools instead of to the borrowers.Moody’s said that DTC loan risk can be mitigated by ensuring that the student displays proof of enrolling in and remaining in school.Other suggestions include capping the lifetime and academic-year loan amount limits, checking that the loan amount requested by the borrowed matches the expected attendance costs of their school, and checking with the credit bureaus to other credit requests by the borrower in order to minimize risk of over-borrowing.Also, to mitigate the risk of fraud, cross-checking the loan applicant for fraud with the credit bureaus and using the bureaus’ fraud scores to rate the application for likelihood of fraud is suggested.Direct-to-consumer (DTC) loans carry a higher risk of borrowed funds not being used for education as well as excessive or unnecessarily expensive debt and as a result could face higher loan default rates and losses than those of more traditional school loans, Moody’s Investors Service reported.
DTC loans have constituted a significant portion of transactions sold by issuers of securities backed by pools of private student loans over the past five years.
But DTC loans are disbursed directly to the student borrower and/or co-signer, and unlike the more traditional school channel loans, are not school certified regarding enrollment status and the loan amount or marketed through school financial aid offices.
Moody’s said DTC loan defaults and delinquencies reflect their weaker credit quality and performance across all issuers who had both types of loans in their securitizations, despite varying results across issuers.
Sallie Mae’s DTC loan expected lifetime default rate is 1.3 times that of their school channel loans, and First Marblehead’s DTC loan rate is 2.9 times that of school channel loans, according to Moody’s.
School channel loans depend on the assurance that borrowed funds will be used for education whereas two key safeguards of school channel loans limit the ability of a student to incur more debt than necessary, Moody’s said.
First, schools provide lenders with certification before disbursement of funds that typically includes verification of borrower enrollment status, grade level, anticipated graduation date and authorized loan amount. Second, funds are disbursed directly to the schools instead of to the borrowers.
Moody’s said that DTC loan risk can be mitigated by ensuring that the student displays proof of enrolling in and remaining in school.
Other suggestions include capping the lifetime and academic-year loan amount limits, checking that the loan amount requested by the borrowed matches the expected attendance costs of their school, and checking with the credit bureaus to other credit requests by the borrower in order to minimize risk of over-borrowing.
Also, to mitigate the risk of fraud, cross-checking the loan applicant for fraud with the credit bureaus and using the bureaus’ fraud scores to rate the application for likelihood of fraud is suggested.
