Student Loan Blog : subprime mortgage crisis fallout

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.

Share this post: email this | del.icio.us | reddit

Government’s Direct Lending Program Sees 43-Percent Increase in Volume

Student Loan Girl — Wed, 03 Sep 2008 00:36:00 GMT

As cash-strapped lenders continue to drop out of the Federal Family Education Loan Program, the number of student loans originated for the 2008–09 school year through the government’s Direct Loan Program has increased by 43 percent, reports The Chronicle of Higher Education (“As ‘Crisis’ Deters Loan Companies, Direct Lending Sees 43-Percent Jump,” Sept. 2, 2008).

Lenders in the FFEL Program — through which borrowers take out federal student loans through private, third-party lenders including banks, state agencies, and nonprofit lenders — have generally accounted for 80 percent of all federal student loan volume, according to the House Committee on Education and Labor (“The College Loan Landscape,” March 2008).

But the Direct Loan Program, which provides loans to students and parents directly from the Department of Education, is gaining ground. As of August 8, the Direct Loan Program had already originated more than $10.84 billion in federal student loans at 1,156 colleges and universities. At this time last year, the direct-lending program, had originated just $7.55 billion in loans at 851 institutions.

And although the exact figures have yet to be released, the Education Department estimates that the Direct Loan Program, which has generally made up 20 percent of all federal college loan volume, will soon be comparable in size to the FFEL program. FFELP lenders have only issued $13 billion in federal student loans at 3,230 colleges and universities this academic year, compared to the $55.8 billion in student loans they originated at 4,612 schools last year.

So Far, A Smooth Transition to Direct Lending

Government subsidy cuts to FFELP lenders enacted by the College Cost Reduction and Access Act last September, as well as continued fallout from the subprime mortgage crisis, have led more than 100 lenders to suspend their participation in the FFEL program.

By April of this year, some 5.8 percent of lenders remaining in the FFEL program had switched over to the direct-lending program and another 19.3 percent said they were considering the switch, according to Student Lending Analytics, a company that provides financial aid administrators with data about lenders (“Drift Toward Direct Lending (Update),” Inside Higher Ed, April 30, 2008).

Although some lenders questioned the Education Department’s ability to handle an increase in loan volume through its Direct Loan Program, some financial aid administrators say the Department of Education has done well in handling the influx of business.

Anna Griswold, executive director of student aid and assistant vice president for undergraduate education at Penn State, says she has been “pretty pleased” with the Direct Loan Program and has not experienced any glitches. Penn State, the 10th-largest FFELP lender last year, became a direct-lending school this year after its FFELP lender, the Pennsylvania Higher Education Assistance Agency, stopped offering federal student loans in February.

Penn State borrowers have already taken out $100 million in student loans this year through the direct-lending program.

Share this post: email this | del.icio.us | reddit

Shares of Corinthian Colleges Stock Take Nosedive Over Student Loan Defaults

Student Loan Girl — Fri, 29 Aug 2008 01:56:00 GMT

Despite an 11.5-percent boost in student enrollment and an 18.3-percent growth in revenue over the last quarter, Corinthian Colleges saw its shares tumble in afternoon NASDAQ trading on Tuesday, as investor fears persist of rising defaults on the school network’s student loans (“Defaults Drown Corinthian,” Forbes, Aug. 26, 2008).

Corinthian’s stock value plummeted 19.3 percent, with investors selling off shares even as the company posted a smaller-than-expected fourth-quarter loss, thanks to higher revenues spurred by the increase in enrollment.

Second-Worst Stock Downslide Since Being Dropped by Main Student Loan Provider

Corinthian, a for-profit operator of more than 100 colleges and trade schools in the United States and Canada, has been struggling to maintain a source of financing for its 72,000 students ever since three of its largest student loan providers — Sallie Mae, College Loan Corp., and Student Loan Express — informed the company that, effective March 1, they would no longer be able to offer “serial” private student loans to the schools’ subprime borrowers. These serial transactions provided current subprime student borrowers — those who have weaker or limited credit histories — with subsequent student loans for ongoing studies.

In 2007, over 75 percent of Corinthian’s private student loan portfolio consisted of subprime student loans, and 90 percent of Corinthian’s private student loans in the United States were provided by Sallie Mae.

In fact, the 19-percent drop in Corinthian shares on Tuesday was the biggest percentage decline only since Sallie Mae made its announcement, on January 22, that it would stop issuing subprime private loans to Corinthian’s students. In the last 12 months, up until Tuesday, reports Bloomberg, Corinthian shares had risen 20 percent (“Corinthian Falls After Increases in Student Lending,” Aug. 26, 2008).

Taking Student Loans Into Its Own Hands: Inviting Risk With Revenue

To offset its loss of student loan lenders, Corinthian established a new company-sponsored student loan program in the fourth quarter called ACCESS and, according to Chief Executive Officer Jack Massimino, was able to provide funding for “the vast majority of students.”

But with a greater volume of student loans comes increased exposure to potential student loan defaults, and Corinthian’s defaults in the fourth quarter rose to 9.1 percent of its revenue, compared to 6.2 percent a year ago.

Corinthian’s chief financial officer, Kenneth Ord, said that for the 2009 fiscal year, Corinthian will spend all available cash on student loans that isn’t already earmarked for capital expenditures; however, investors are still uneasy, worried that Corinthian will fall short of its projected earnings for 2009 and may need to write off some of its student loans to stay afloat.

The company’s student loan program — and the higher rate of borrower defaults that investors fear is coming with it — “adds risk to the forecast,” said Jeffrey Silber, an analyst with BMO Capital Markets. “People were expecting sizable margin expansion, and this is going to put a damper on that. People are not giving [Corinthian] the benefit of the doubt.”

Share this post: email this | del.icio.us | reddit

Proposed Bailout for Massachusetts Student Loan Authority Uncertain

Student Loan Girl — Sat, 16 Aug 2008 01:42:00 GMT

A third attempt to generate liquidity for the Massachusetts Educational Financing Authority may be too little too late for some 40,000 Massachusetts college students, reports The Boston Globe (“Student Loan Authority May Not Get State Aid,” Aug. 14, 2008).

In late July, MEFA announced that it wouldn’t have enough money to fund any new private student loans this fall after it was unable to launch a bond offering in time.

With proposals from both the state’s governor and treasurer fizzling out, the student loan agency is attempting to raise about $400 million in funds from large investors through a new bond offering on the public market — a deal that, if completed, wouldn’t be finalized until September.

But bonds issued by student loan lenders are having a hard time finding buyers, as investors remain cautious in the wake of the collapse of the subprime mortgage market and the ongoing resulting credit crunch. According to The Boston Globe, the issue of $350 million in student loan revenue bonds just completed on August 7 by the Higher Education Student Assistance Authority of New Jersey was the first successful student loan bond issue since May.

Several Solutions, Few Viable Options

Soon after MEFA announced that it was suspending its private loan program, Gov. Deval Patrick asked that the Massachusetts state pension fund purchase $50 million of the planned upcoming MEFA bond offering, but the request has been rejected by State Treasurer Timothy Cahill. The pension fund’s executive director has said this direct purchase of MEFA bonds would violate the fund’s investment policies.

Cahill has suggested an alternative solution, in which the state would back the MEFA bond offering, using taxpayer funds as collateral. But this initiative would require approval by the state legislature, which isn’t scheduled to meet until October.

Of the ideas lobbied so far as possible ways to help MEFA regain its financial ability to offer student loans, the proposal with the most potential, put forth by some of the state’s colleges and universities, may not go into effect until next year.

This plan would reinstate a participation fund, phased out several years ago, in which schools set aside up to 6 percent of the loan amounts their students take out through MEFA. These stockpiled funds serve as a type of insurance for bondholders and may provide a draw for otherwise reluctant potential investors.

Though most Massachusetts students have already begun pursuing other financing options, Cyndi Roy, the governor’s deputy press secretary, says that the administration is continuing to work with the state’s loan authority.

“Governor Patrick put a serious, viable proposal on the table,” said Roy, “and he remains actively engaged with MEFA on that and any other solutions that will help 40,000 Massachusetts families send their children to college this year.”

Share this post: email this | del.icio.us | reddit

Governor Launches Website to Help Massachusetts Families Find Student Loans

Student Loan Girl — Thu, 07 Aug 2008 11:32:00 GMT

Massachusetts Gov. Deval Patrick has set up a financial assistance website to help the 40,000 families who were previously served by the Massachusetts Educational Financing Authority to find a new student loan provider for the 2008–09 academic year, following MEFA’s announcement on July 28 that it was suspending its private student loan program.

The news that MEFA would no longer be offering private student loans came just weeks before fall tuition payments are due and a mere three months after the state agency suspended its federal student loan program, citing the troubled economy and continuing fallout from the collapse of the subprime mortgage market. MEFA’s announcement last week marks the first time in the lender’s nearly 30-year history that it won’t be able to provide any student loans, federal or private.

The governor’s new student loans website gives borrowers an overview of student loans and the different types of student loans still available, provides links for families to compare the interest rates being offered by certain private student loan lenders, and brings together information on scholarship resources.

“It is critical for our students to be able to pay for the colleges of their choosing,” said Gov. Patrick. “I have directed my team to make available a list of resources to help students and their families locate the information they need to finance education this fall and beyond.”

Late yesterday, Gov. Patrick also made a move aimed at restoring liquidity to MEFA, asking the Massachusetts pension fund to invest $50 million in the state student loan agency by buying MEFA bonds — MEFA would use the proceeds from the bond sale to finance new student loans. The governor intends to approach Boston College, Harvard, MIT, and the University of Massachusetts, among other schools in the state, about making similar investments.

Share this post: email this | del.icio.us | reddit

Student Loan-Comparison Websites Losing Lenders, Gaining Borrowers

Student Loan Girl — Mon, 14 Jul 2008 17:42:00 GMT

While demand for websites that allow borrowers to compare student loans is growing, the number of lenders listed on these sites is dwindling, according to an article in The Chronicle of Higher Education (“Web Sites That Compare Loans Gain Users, Lose Lenders,” July 18, 2008 issue).

Over the past year, SimpleTuition, one of the most popular student-loan comparison sites, has seen the number of lenders listed on its site plummet to 27 from a high of 72.

Hurt by government subsidy cuts and fallout from the subprime mortgage crisis, some lenders have left the student loan business altogether, while those lenders that have continued to make student loans are now unwilling to pay for placement on loan-comparison sites in a tight credit market.

“The difficulties and discontinuities have opened the door for something that’s going to be very beneficial to consumers,” said Marc Stein, co-founder of College Loan Market, a site that matches borrowers with lenders.

Student-Loan Borrowers, Loan-Comparison Sites Not Deterred by Loss of Lenders

Although loan-comparison sites are losing lenders, the sites are gaining popularity with parents and students, more of whom are turning to the websites when searching for financial aid.

SimpleTuition gets about 10,000 hits a day, more than five times the hits it received a year ago, and more colleges and universities are adding links to the loan-comparison site from their institutions’ financial aid pages.

And despite market difficulties, a string of new sites similar to the model used by LendingTree.com, a site that matches users with various types of loans, are expected to launch this summer. On these new sites, borrowers will be matched directly with lenders based on borrowers’ personal profiles and the type of loan being sought — a move that should make it easier for borrowers to get realistic quotes and for lenders to market their products directly to specific borrowers.

Share this post: email this | del.icio.us | reddit