Former students may be buckling under a weight of debt in a slow economy, but fewer and fewer of them are defaulting on private education loans.
Moody’s Investors Service reported today that defaults on securitized private student loans that it rates continue to decline in the first quarter, to 3.4%.That was unchanged from the previous quarter but down slightly from 4.0% in the first quarter of 2013.
Moody’s expects that the default rate for student loans not guaranteed by the federal government will continue to decline for the remainder this year, though perhaps not to the low levels reached before the recession.
“Relatively high unemployment, combined with high student loan debt, persistent underemployment and lower earnings will make it difficult for the rates to fully revert to pre-recession levels,” Moody’s stated in its report.
Rather, rates will continue to fall primarily because loans in 2010-14 securitizations are to borrowers of considerably stronger credit quality than those in prior securitizations, and loan pools in 2001-07 securitizations will continue to season past their peak default periods.
Moody’s expects the unemployment rate, an important indicator of borrower’s ability to repay student loans, will continue to fall. It’s calling for a range from 6.0% to 7.0% in 2014 and 5.5% to 6.5% in 2015. That’s lower than the 6.7% to 7.9% rate in 2013, but still high by historical standards. “Declining unemployment means borrowers will be better able to repay their loans; however, higher student loan debt, higher underemployment and lower earnings than pre-recession will continue to hurt borrowers’ ability to repay loans,” the report states.
Other measures of student loan performance also improved in the first quarter. The percentage of loans more than 90 days late on payments was 2.2%, a slight decreased from the 2.3% of the last 16 consecutive quarters of year-over-year improvement.
And the forbearance rate fell to a historic low of 1.9% in the first quarter from 2.0% the previous quarter and 2.4% in the year-earlier period.
Moody’s private student loan indices track more than 10 years of credit performance data on 73 private student loan securitizations. Deals by SLM, First Marblehead Corp., The Student Loan Corp., Keycorp, and Access Group constitute almost 84% of the securitizations underlying the indices.
The performance improvement is in sharp contrast to rising defaults on federal student loans. The percentage of students who defaulted on such loans in the first three years after they were required to make payments rose to 14.7% during fiscal year 2010,the most recent data available from the Department of Education. That was up from13.5% a year earlier.
This week, President Obama ordered changes that could help millions of borrowers make their payments more affordable starting in December 2015. The Pay As You Earn plan, which allows students with financial hardship (or high debt relative to monthly income) to pay off student loans at lower monthly rates, was expanded to include those with outstanding loans initiated before October 2007. The changes would allow an additional 5 million borrowers to qualify.
