Anticipating a Falloff in Student Loan Defaults

Student Loan Girl — Thu, 22 Oct 2009 19:47:00 GMT

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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The Plot Thickens for the Future of Student Lending

Student Loan Girl — Tue, 14 Apr 2009 00:00:00 GMT

It’s “all hands on deck” for federal student loan lenders. The banks and third-party student loan providers that make up the Federal Family Education Loan Program have made it abundantly clear that they’re not going to roll over and accept the terms of the Obama administration’s proposal to axe their loan program in favor of the Education Department’s Direct Loan Program without a fight, The New York Times reports (“Plan to Change Student Lending Sets Up a Fight,” April 12, 2009)

“We can either meet or beat the budget savings that are in the president’s budget with the exact same system that we have got working now with maybe a few tweaks,” said Albert Lord, chief executive of Sallie Mae, the largest student loan provider participating in the FFEL program.

According to Congressional Budget Office calculations, establishing the Direct Loan Program as the sole provider of federal student loans is projected to save the government $94 billion over the next 10 years, savings that President Obama has said would be funneled directly into the federal Pell Grant Program for low-income students.

Lender-Proposed Alternatives Come Up Short

Lord and other FFELP lenders who oppose the administration’s plan are pushing for a compromise between the Obama plan and the current system that would allow them to continue offering students valuable lending services — quality customer relations, billing, and default prevention and collection — and still achieve Obama’s goal of saving taxpayers money.

FFELP lenders say such dually-beneficial partnerships are possible, which can be evidenced by a compromise that Congress approved last year that allows FFELP lenders to originate student loans using federal money and to resell the loans back to the government. FFELP lenders, which provide more than $56 billion of the nation’s federal student loans, were able to continue making loans to families and the government was able to ensure that families still had access to federal student loans.

But the savings Sallie Mae projects under its compromise plan still only add up to about 82 percent of the president’s savings goal over the next five years.

Supporters of the president’s plan say that this savings shortfall, as well as the fact that FFELP lenders are still relying on the government’s help to retain lending capital, raises the question, “why do we even need private lenders,” asked Representative Timothy Bishop, D–N.Y., a former provost of Southampton College.

Bishop argues that expanding the Direct Loan Program, which provides federal student loan funds directly to more than 1,500 schools is “obvious and long overdue,” being that over the last few decades private lenders have earned huge profits at relatively no risk because the government guarantees repayment up to 97 percent.

Factional In-Fighting Could Favor Lenders

In addition to battling lenders, lawmakers are also fighting an internal battle. Republicans say Obama’s plan is just another means to expand government control over the private sector, while Democrats are divided, with some legislators favoring the plan while others, who represent districts that rely heavily on student loan providers for employment, are siding with private lenders.

Allen Boyd, D–Fla., argues that the president’s proposal could jeopardize thousands of jobs across the country, including 650 in his own district, at a time when unemployment is already rampant. And the states that administer loans through state-based guarantee agencies, considered quasi-government entities that benefit the same as private lenders, are fighting to retain their lending business.

To help keep these quasi-government agencies afloat if they lose their FFELP business, the Obama administration has proposed spending $500 million a year on these agencies’ financial literacy programs and services.

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Student Loan Blog : Sallie Mae, Albert Lord

Anticipating a Falloff in Student Loan Defaults

The Plot Thickens for the Future of Student Lending