Better post crisis underwriting criteria is behind the two and half years drop in defaults for private student loans, according to Moody's Investors Service.  

The default rate in the Moody’s Investor Service private student loan (PSL) indices was 2.9% in second-quarter of 2014, dropping below 3.0% for the first time since 2006; the 90-plus delinquency rate index also fell, to 1.9% from 2.2% in the previous quarter.    

Although student loan performance is highly correlated to the economic environment (during the crisis, the high unemployment rate pushed delinquencies and defaults up), deals issued post crisis benefit from significantly higher credit enhancement and more stringent underwriting standards on the underlying loans. Private student loan ABS issued prior to the crisis suffered elevated ratings volatility and downgrades as a result, according to a September Fitch Ratings report.

“After the collapse of the financial markets in 2008, lenders tightened their underwriting criteria, requiring school certification, higher FICO scores and the addition of a co- signer on loans,” stated Moody's.

This credit tightening has translated into better performance for more recent deals, as the loans enter repayment. 

However the emerging concern today is how underemployment —low-skill jobs with low pay — will impact borrower performance. “High underemployment, particularly for young graduates, combined with high student loan debt and stagnant earnings will continue to present challenges for borrowers,” the report states.

The chart below tracks private student loan performance.

Subscribe Now

Access to a full range of industry content, analysis and expert commentary.

30-Day Free Trial

No credit card required. Access coverage of the securitization marketplace, including breaking news updated throughout the day.