Private student lending is enjoying something of a recovery, and it appears to have a lot to do with the improving market for college graduates.
SLM Corp., known as Sallie Mae and the nation's largest private student lender, boasts a growing portfolio of new loans, and they are far healthier than those it originated in previous years, Chief Executive Albert Lord said at a conference in Miami on Wednesday.
"We expect credit losses of 1% or less annually," Lord said, of his company's new loans. "It's Sallie Mae's future. It's a wonderful business."
Behind the improving loan outlook is the brightening outlook for college graduates themselves. The unemployment rate among recent college graduates fell to 7.7% in 2012 from 9% between 2009 and 2011, Moody's Investors Service noted in a recent report.
"The rate will likely continue to improve gradually in 2013-14, in line with our forecast for a gradual improvement in unemployment for the overall population," Moody's says. "Unemployment is a key driver of student loan delinquencies and defaults."
The upbeat news on jobs comes as private lenders are feeling less pain from defaults on pre-crisis private loans. Standards for private student loans have tightened considerably since 2008. Average credit scores are up, and more than 90% of new loans are being underwritten with a parent or other co-signer backing up the student-borrower.
"The credit quality of loans that are being originated today is very strong," says Moshe Orenbuch, an analyst with Credit Suisse.
But even signs of improvement in the employment picture come with caveats. Tracy Rice, a Moody's analyst, notes that students are carrying higher debt levels, and some graduates are settling for lower-paying jobs.
"Unemployment is one of the key drivers of performance of student loans, but it's not the only driver," she says
Another concern for private lenders is that Congress might amend the law to permit educational borrowers to discharge loans by declaring bankruptcy. That idea, championed by Democratic Sen. Richard Durbin, has drawn strong opposition from private student lenders.