Inflation and lack of pandemic federal stimulus assistance may be causing initial performance deterioration in U.S. student loan asset-backed securities (SLABS) pools, but the effects should not be cause for alarm long term, industry observers noted in a recent study of SLABS performance.
The Federal Family Education Loan Program (FFELP) ABS’ delinquency increased during the first quarter of 2022, Fitch Ratings said in a May 18 update. The more than 30-day delinquency in March 2022 was 11.58%, up from 10,17% in December and 8.52% in March 2021. Delinquencies more than 60-days overdue were 7.69%, up from 6.43% in December and 5.54% in March 2021; the 90-day delinquency rate increased to 5.51% in March, up from 4.47% in December 2021 and 3.89 in March 2021, according to Fitch.
Fitch analysts, however, insist that the recent numbers should not be a cause for alarm.
“This is really just a normalization compared to the same period of last year where most of the borrowers were benefiting from stimulus and payment forbearance, so therefore they were not delinquent,” said Nicole Edwards, a director in Fitch Ratings’ ABS group. “The use of forbearance early in the pandemic, combined with the stimulus payments strengthened borrowers’ ability to pay and kept delinquencies and defaults low compared to historic numbers.”
Among private student loans, the more than 30-day delinquency rate was 3.47% at the end of the first quarter, up from 2.57% during the same time period the previous year.
The more than 60-day delinquency is up to 1.82%, up from 1.52% in December and 1.48% in the first quarter of 2021. Ninety-day delinquencies clocked in at .99% in the first quarter, up from .78% in December and .76% in the first quarter of last year.
Edwards said that she expects delinquencies to trend downward, similar to the rise in early stage delinquencies in 2020, but says it may be tempered somewhat due to high inflation.
“Under these conditions borrowers will need to prioritize spending and payment obligations, which will drive an increase in borrowers defaulting,” Edwards said. “However, financially-challenged borrowers have payment options and so we will have to wait-and-see what happens with delinquencies and defaults.”
The trailing twelve month constant default rate was at 2.41% for the quarter, higher than the 2.17% for the last quarter of 2021, Fitch reported. Conversely, the trailing twelve-month principal payment rate and constant prepayment rate increased for the first quarter of this year, Fitch said.
Loan consolidation and borrowers seeking forgiveness under the Public Service Loan Forgiveness program under the limited time waiver, which allows for payments prior to consolidation into the Federal Direct loan program contributed to the increase, Fitch said.
Other industry professionals concur that student ABS is showing increased delinquency rates, along with prepay pressures stemming from some government intervention programs.
BofA Global Research said in a report last month that its latest data showed delinquency rates have increased for in-school private SLABS as forbearance rates have declined. It also noted that the U.S. Department of Education’s move to bring borrowers closer to public service/income driven repayment forgiveness could place upward pressure on prepays for FFELP ABS.
Theresa O’Neill, strategist at BofA Securities, says that she is seeing some weakness in credit performance.
“With respect to consumer debt, everything non-mortgage, we are anticipating stable to weaker performance in most consumer sectors,” O’Neill said.
O’Neill said that BofA anticipates that refi student loans will probably see fairly stable credit performance.
Defaults for the traditional in-school private student loan asset backed securities rose to 1.67% last quarter, up from 1.57% in 2021’s fourth quarter, Fitch reported.
BofA also expects in-school and FFELP ABS to see moderately weaker performance, O’Neill said.
Looking ahead, everyday living is getting more expensive for students, with student loan interest rates that can increase, not to mention inflation near a 40-year high of 8.3%, according to Jacob Channel, the senior economist at Student Loan Hero by LendingTree.
