U.S. student loan issuance is expected to remain around the same levels observed in both 2009 and 2010 according to report by Henderson Global Investors.
Analysts estimated that the market will generate approximately $19 billion in 2011 and make-up roughly 11% of the overall ABS market, according to a recent study by These figures are down from a high of $80 billion in 2006 that compromised about 20% of the overall pre-crisis ABS market.
Another trend that is anticipated is a decrease in individual FFELP loan prepayment rates (CPR). Overall, there are about $250 billion of student loan ABS currently outstanding, according to J.P. Morgan.
According to the Henderson report, the Federal subsidies provided necessary relief to the origination of FFELP loans by allowing lenders to sell recently originated loans to the Department of Education or providing subsidies through a government vehicle.
Prior to the crisis, FFELP loans made-up about 75% of student loan issuance. Individual Federal Family Education Loan Program (FFELP) loans originally benefited from increased government support following the financial crisis under Ensuring Continued Access to Student Loans Act (ECASLA) established in 2008.
The enactment of ECASLA has resulted in the purchase or funding of over $210 billion in FFELP loans to date.
However, an entire sector of the industry was entirely eliminated when Federal subsidies for FFELP consolidation loans ended in late 2007. On June 30, 2010, the government officially stopped its support for the origination of new FFELP loans.
This policy change is also expected to maintain the spread and extend the average lives of FFELP-backed ABS.
The only type of student loans to be guaranteed by the government would be the Federal Direct Loan Program (FDLP), which experienced a noticeable influx during the financial crisis due to the resulting uncertainty in the market. According to the Henderson report, these are the only loans that are currently being originated in large volumes.
The fourth major category of student loans, private non-guaranteed loans, has suffered throughout the crisis due to the negative starting point at which lenders could sell private student loan ABS as compared to the interest rate they could charge on the loans.
Also, it endured a lack of demand among investors as a result of the instability and worries on the reliability of non-governmental lenders. The high risk premium resulting from these market conditions have allowed only a few transactions to occur recently and caused loan origination to decrease in this sector.
As mentioned in the Henderson report, issuance in this category of student loans is expected to rise based on the fact that spreads on private student loan ABS continue to constrict.
New Legislation Could also Impact Volumes
The future of the private student loan market is also the subject of recently proposed legislation meant to repeal an amendment added to the U.S. Bankruptcy code in 2005.
The goal of the new Act is to make it easier for specific student loans to be considered dischargeable in bankruptcy court.
At the forefront of the debate have been the law’s potential implications on private student loan ABS. According to a report by Bank of America, they believe the proposed legislation, in addition to the newly implemented regulations on gainful employment, will have a minimal impact on the sector.
The original intention of the amendment made in 2005 was to increase the availability of private student loans by easing the fears of lenders, who were hesitant to lend to students lacking credit history.
However, the practice of requiring a co-signor now serves this purpose, making the law unnecessary. In fact, as cited in the report by Bank of America, 60% and 74% of Sallie Mae’s and Discover’s private student loan portfolios respectively have co-signors.
According to the report by Bank of America Merrill Lynch, the biggest resulting change from this legislation if enacted would be the increase in bankruptcy-related charge-offs in private student loan portfolios. This consequence could also manifest itself in other consumer debt portfolios if the filing borrower holds other types of debt, such as credit cards.
The new gainful employment regulations are a list of qualifications that a for-profit program or a certificate program at a public or non-profit school must satisfy in order to receive federal aid. It is meant to ensure that the institutions are properly preparing students for gainful employment upon the successful completion of their degrees.
Requirements focus on repayment rate, debt-to-discretionary-income-ratio, and debt-to-total earnings. It also provides an outline of consequences for institutions do not meet the criteria.
According to the BofAML report , this too should have a minimal effect on the private loan ABS market because most of the key lenders abide by similar rules and already reject schools that would be unlikely of passing these regulations.
