The increase in student loan consolidation products is credit negative for private SLABS given that prepayments by high-quality borrowers will rise, according to a Moody’s Investors Service report released yesterday.
On Aug. 2 Sun Trust Bank launched a loan product that consolidates a borrower’s private student loans. Additonally, the second-largest private student loan lender Wells Fargo and numerous credit unions have also started offering private consolidation loans, the rating agency noted.
Moody's said that this trend will lessen the availability of excess spread to cover loan losses from poorer quality borrowers. These borrowers will be unable to prepay and are expected to later default on their loans. The excess spread is the interest income on ABS assets minus interest costs on securitization liabilities and other transaction expenses., Moody's analysts wrote.
“If new consolidation loan offers draw high-quality borrowers out of existing private student loan securitizations, their loans will no longer produce excess spread to cover loan losses of poorer quality borrowers,” Moody’s said.
Additionally, the rating agency explained that deals that having loans originated during the credit crisis will suffer the most given the high interest rates lenders gave to loans over that period.
For instance, borrowers of loans from this period comprising most of the loans in Sallie Mae’s 2009-12 securitizations are now paying variable interest rates at a 6%-8% average.
This is compared with 4%-6% for loans backing the biggest student loan lender’s 2002-07 ABS, Moody's cited.
Meanwhile, SunTrust is providing loans that have variable interest rates of 4%-8%. How many loan consolidations will result from this will mostly rely on how tight SunTrust’s underwriting will be for the more attractively priced loans, Moody's said.
In other student loan research, these problems with private student loans are happening while U.S. student debt outstanding has been increasing at an average ofr over 10% annually to close $1 trillion since 2003.
This exceeds auto loan and credit card debt for the first time in 2010, according to a Standard & Poor’s report also released yesterday.
S&P added that although the growth mostly comes from government funds or guarantees, the rise of student borrowing can negatively impact future consumer finances.
Even though education usually results in lower unemployment and higher pay prospects for graduates, the increasing cost and high unemployment rate for new college graduates places in doubt the value of a college education particularly in recent years.
S&P said that the default rates are higher while graduation rates are lower for for-profit schools. College enrollment has gone up the most for for-profit schools in recent years and those students borrow the most, which signals an imbalance in that part of the market.