Private student loans originated after 2008 are performing better than Federal Family Education Loan Program (FFELP) student loans, according to a Moody’s Investors Service report.
According to the report the cumulative default rates for the 2008-12 private student loan securitizations rated by Moody’s is substantially lower than those of pre-2008 securitizations – that rate in 2012 was less that 2% compared to 21% in 2007.
Late-stage delinquency rates and forbearance rates, also point to a further widening in performance. the 90-plus delinquency rate for private student loans ABS rate by Moody’s was 2.5% in fourth-quarter 2012; the rate for FFELP securitizations has been significantly higher, between 10 and 15%.
The forbearance rate, another measure of borrowers’ financial distress, is at an all-time low of 2.5% for private student loans, but remains high for FFELP loans, at around 15%.
Better underwriting criteria for private student loans has in recent years has contributed to improved performance for these assets and will continue to boost the gap between private SLABS and FFELP ABS default rates.
“FFELP student loans required no underwriting for most loan types and the credit quality of FFELP student loans has weakened slightly over the last couple of years,” said analysts in the report.
Only 10% of private loans in the 2008-13 securitizations that Moody’s rated are to borrowers with FICO scores below 670, significantly lower than 20% before 2008.
By contrast, a 2013 FICO study cited in the report shows that approximately 50% of student loans originated in 2010 were to borrowers with FICO scores below 660, similar to 2005 originations. "This trend of improvement does not hold true for borrowers of federal loans," said analysts in the report.