Anticipating a Falloff in Student Loan Defaults

After hitting a new high of $443 million in charge-offs on its student loans this past quarter, major student lender Sallie Mae anticipates a slowdown in these student loan defaults, the company announced during its third-quarter earnings call yesterday (SLM Corp. Q3 Earnings Call Transcript, Oct. 21, 2009).

Although Sallie Mae’s student loan charge-offs — the student loans the company writes off as defaulted and not being repaid — rose to a total of $443 million over the third quarter, up from $355 million in the previous quarter, monthly charge-offs declined month by month through the third quarter itself.

Monthly student loan charge-offs during the third quarter fell from $160 million in July to $129 million in September, and the company sees this trend continuing into 2010 as more borrowers with stronger credit profiles begin to represent a larger portion of Sallie Mae’s student loan portfolio.

In the credit crunch that followed the subprime mortgage implosion, Sallie Mae and other student lenders struggled to find investors willing to buy bundled student loans and take on the risk of student borrowers. As a result, student loan lenders tightened their credit criteria for their private student loans, requiring higher credit scores from borrowers and creditworthy co-signers for student borrowers with low or unestablished credit.

“The credit of the new borrowers is extraordinarily strong,” said Albert Lord, Sallie Mae’s chief executive officer.

Remondi concurred, “The quality of the loans we disbursed in the [third] quarter was very strong,” with an average borrower FICO credit score of 746 and with 88 percent of the loans carrying a co-signer. In 2007, only 54 percent of the company’s private student loans carried a co-signer.

Already, October 2009 charge-offs are projected to be more than $40 million lower than in July, Remondi said.

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