The number of borrowers behind on private student loan payments rose slightly in the fourth quarter of 2015, but the overall trend is for continued improvement, according to Fitch Ratings.
The 90-day delinquency rate for Fitch’s U.S. Student Loan ABS Index of securitized loans not guaranteed by the U.S. government, was 0.72%, up 4 basis points on the quarter but down on the year. Late payments are also well below the 2009 peak of nearly 1.2%.
In addition, the gross default rate increased to 2.44% at the end of December from 2.22% at the end of October, but remains well below the peak level of 6% in the third quarter of 2009.
Meanwhile, the forbearance rate for private loans remains at an all-time low of 1.74%.
Borrowers generally use private student loans to cover gaps between the cost of education and the amount of financing they can obtain in the form of federally guaranteed loans. Since the financial crisis, lenders still in business have tightened underwriting criteria, increased their use of co-signers who have a documented ability to repay, and have asked schools to verify the amount that students need to borrow before disbursing directly to the school.
Fitch said that overall cumulative default rates for private student loans have remained stable; default rates on loans issued between 2009 and 2012 remain below 10%. Those loans “continue to show signs of leveling off,” the agency reported. “Due to a more intense underwriting criteria established in 2009, Fitch expects vintages originated after 2012 to perform similarly.”
The rates for 2007 vintage private student loans remain above 30%, reflecting weaker underwriting at the start of the financial crisis, the rating agency stated.
The trend in federally guaranteed student loans couldn’t be more different; defaults on Federal Family Education Loans rose to 4.27% in the fourth quarter, a 13 basis point increase over the third quarter and a 12 basis point increase on the year. Delinquency rates also rose to 3.25% for loans 30 days past due (up from 3.12% in 3Q), and 1.32% for loans 90 days past due. Fitch stated the 90-day delinquency rate remains “relatively stable” on a historical basis – that rate has not exceeded 1.5% dating back to 2004 in Fitch’s delinquency index.
Forbearance rates on FFELP reached an all-time low at 9.82% – a 21 basis point improvement over the third quarter – and deferment rates remain at a 10-year low of 8.24%, about one half the peak level of 17% in 2009. Fitch cites continuing economic improvement in employment, income and consumer confidence for the stability.
Fitch’s outlook for FFELP loans remains negative, though, “as widespread rating actions could result from emerging maturity risk issues due to the decline in student loan principal payment speeds following the consolidation wave and slow recovery in the job market for graduates after the recession,” the report stated. “Additionally, the growth of government-sponsored student loan payment plans, such as the [income-based repayment] plan, has helped push down repayment speeds.”
In December, Fitch placed 238 tranches of 118 FFELP ABS trusts under review for a possible downgrade, citing the “heightened risk” that they would not pay off at maturity.
While slower repayment is “partially offset” by improving labor market, Fitch expects that FFELP ABS will remain at risk of extending beyond legal final maturity due to the seasoning of FFELP portfolios and recent issuer actions in exercising cleanup call provisions of remaining principal and other optional purchases. FFELP ABS issuance is expected to be higher this year, due to the diminished volume levels 2015 when new issuance stalled in the second half of the year.
The agency’s 2016 outlook for private loans is stable. “Lenders have remained disciplined in underwriting, typically with co-signers and higher credit scores, and disbursed through school channels, which attributed to better vintage performance for loans originated after the crisis,” the report stated.
Fitch noted there is still discussion of making private student loans dischargeable in bankruptcy, stirred by the recommendation by the Consumer Financial Protection Bureau and the U.S. departments of Education and Treasury. In 2015, the industry “seemed resistant to introducing new income-driven programs in the PSL space, which, from the ABS perspective, will create more cash flow uncertainties and add more complexity in estimating duration and maturity,” the report states
Private and FFELP student loan debt totaled $1.23 trillion at year’s end, a $29 billion increase from the previous quarter, as student loan debt remains the largest category of non-housing debt class in the country ahead of auto loans ($1.06 trillion) and credit-card debt ($733 billion).