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New Blow to Private Student Loan Market

Written by David S. Nelson    Sunday, 25 December 2011

Private lenders, never a big part of the student loan market, have fled in droves over the past few years. Now some analysts are warning that new legislation and an increasing wave of defaults could drive out the last few holdouts. Sen. Dick Durbin, D-Ill., and Rep. Steve Cohen, D-Tenn., introduced legislation in May that would allow private student loan debt to be discharged in bankruptcy, reversing a change made in 2005. Some analysts have said that if the proposal becomes a law, it would reduce what little demand remains for private student loan securitizations. But that market has a more immediate problem do deal with: more students are falling behind on their loan payments, according to Claire Mezzanotte, a managing director of structured finance at the Toronto credit rating agency DBRS. The share of student loans in repayment that are 60 days or more delinquent has doubled to 4.9% in the second quarter of 2011 from 2.5% in the second quarter of 2006, according to DBRS. Gross defaults of 1.3% on private loans "continue to remain relatively high, at approximately triple the levels seen pre-recession," Mezzanotte writes in a report published Wednesday. Students graduating with debt since the recession are facing an uncertain economy and high unemployment, which has made it more difficult for them to find jobs and start paying off their loans. Federal student loans generally offer repayment assistance, forgiveness and debt relief programs, but private lenders have been more reluctant to offer such forbearance programs, Mezzanotte writes. The number of private lenders offering student loans has dropped to "just a handful" from more than 80 in 2007, as players are "either exiting the business when liquidity and funding dried-up, or through industry consolidation," Mezzanotte writes. A recent law has also had an impact on the market. President Obama last year signed a law ending government subsidies to banks for participating in the Federal Family Education Loan Program. It's estimated private student loan origination will fall to 10% this year, from 25% in 2007, according to DBRS, which cited reports from the private lender Sallie Mae (aka SLM Corp.) and the Department of Education. Federal student loan origination volume has jumped 60%, to $104 billion, from 2007 through 2010, DBRS found. Before that change, the private student loan market was relatively profitable and faced fewer restrictions than federal loan programs. Now the remaining private student lenders are confronting another potential blow. Students have been allowed to discharge government-guaranteed loans in bankruptcy since 1978, but changes made to the bankruptcy code in 2005 barred discharges of private student loans. The legislation proposed by Sen. Durbin and Rep. Cohen would once again allow privately issued student loans to be discharged in bankruptcy. DBRS says 35 organizations representing students, consumers and higher education institutions have expressed support for the bill.

Last Updated ( Sunday, 25 December 2011 )