Bank of America Merrill Lynch analysts maintain their positive view on student loan ABS given recent reports showing trends that can reduce headline risk in the sector.
They cited the College Board releasing its annual reports regarding the trends in student aid and college pricing.
According to the analysts, the board reported that financial aid decreased on a year-over-year basis and for-profit schools experienced the lowest year-over-year rises in tuition and fees.
Even though the longer-term trends of higher financial aid and tuition and fees still remain, the drop in aid between the 2011-2012 and 2010-2011 academic years might mean a slowdown in the feedback loop that has resulted in higher tuition and fees, analysts stated. These developments should assist in reducing headline risk in the student loan ABS sector, they said.
They added that given spreads remaining basically unchanged in both markets, CLOs still seem more attractive versus private student loan ABS. The incremental spread/yield from CLOs stands at five basis points. Meanwhile, the incremental spread/yield in private student loan ABS over CMBS A4 notes moved back to 55 basis points, as CMBS spreads widened by five basis points.
The data in the student aid report also showed that origination volume for student loans dipped between 2010-11 AY and 2011-2012 AY, while the data in the pricing report demonstrated gross and net tuition and fees actually rose. Meanwhile, the longer-term trends for loan volumes and tuition and fees have been fairly consistent as both have gone up.
BofA Merrill analysts think that these longer-term trends are not sustainable. The recent dip in student loan debt might be the early stages of a break in the feedback loop that has been supporting higher tuition and fee levels. Examples of these are rising levels of financial aid leading to increasing enrollment levels. This has, in turn, resulted in higher tuition and fees. However, they said that the current fiscal constraints at the Federal, state and local levels should mean any break in the feedback loop will be slow or tuition and fees are expected to still rise because of lower funding by government appropriations.
Inspite of the recent dip in loan volume, aggregate student loan debt levels are seen to be relatively high. Analysts showed via data that the average total debt levels for Bachelor’s Degree recipients who borrowed was $23,800 for those receiving a degree from public schools in AY 2010-11 and $29,900 for those students from private not-for-profit in AY 2010-11. This high level of debt means that if there is no improvement in the employment market, borrowers might have difficulty making student loan payments, analysts explained.
The data in the two reports published by the College Board offer good benchmarks for the student loan market, BofA Merrill Lynch analysts said. They added that reports are good to determine the fund composition utilized for paying college (an indication of student loan demand), the relationship between gross and net tuition and fees (which shows the demand for loans) and the schools attended by students (these affect default rates), analysts said.