New data suggests that changes in rules governing how FFELP lenders make decisions on student loan applications are having an unfortunate effect of putting more borrowers into private student loans.

34 CFR 682.201 (c) (2) (iii) (pdf) allows lenders in Federal Financial loans to adopt more stringent underwriting criteria.  I n the past, lenders could look at existing credit accounts held by loan applicants.  An applicant with a 90-day delinquency was out.

Now, however, it seems that some banks are looking at the existence of 90-day delinquencies by applicants as far back as the last five years.  Other criteria (for the last five years) can include a bankruptcy, a foreclosure, a tax lien, a wage garnishment, or a repossession.

The result, not surprisingly, is that borrowers have been having a harder time getting federally-guaranteed student (more…)

You cannot regulate it if you can’t regulate it.

The four financial regulator agencies accepted comments up to Thursday afternoon on a proposed rulemaking to apply the Community Reinvestment Act to the private student loan industry.  The proposed rule asked commenters for suggestions about how CRA credit could be designed to encourage the supply of low-cost student loans to low-income students.

We made the following comments (pdf) 11 pages.

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The US Department of Education awarded servicing contracts to four companies today.  Each of the four will have the opportunity to manage payments of federal student loans.

The four companies chosen were NelNet Servicing, Great Lakes Educational Loan Services, Sallie Mae, and the Pennsylvania Higher Education Assistance Authority.

It is a 5-year contract.

Wells Fargo was a finalist, but it turned down the chance to submit a bid during the final round.  ACS, the current provider for the Direct Loan program, did not get a contract.

It is a lot of business.  Although Sallie Mae acknowledges in its press release that margins are lower than the normal industry agreement, there is still a lot of money here.  The Departments educational loan portfolio is worth $550 billion.  It has as many as 50 million customers.

The Department added an interesting caveat to the contracts.  The allotment of business divided among the four firms will be determined by loan performance.  Firms that generate better loan payments will subsequently receive a higher share of future work.

The student loan asset backed securities market is finally functioning, although it is certainly not as robust as it was as recently as in 2007.

Whereas a National Collegiate Student Loan Trust (NCSLT 2007-2) from 2007 offered tranches with a weighted average interest rate of LIBOR plus 5.13 percent, today’s are much higher.

Student Lending Analytics is showing that recent offerings are as much as LIBOR plus 11 percent.  Its a factor of the lack of liquidity, and or the lack of investor confidence in markets. It is also a product of the increased costs that lenders are paying on the funds that they borrow.

That does not bode well for students who go to private student loans. Granted, LIBOR has dropped some.  Nonetheless, these are very high prices for debt. For a student with $25,000 in private loans upon graduation, monthly payments on a 15-year loan would be as much as $350.  With a LIBOr plus interest rate of 15 percent, a student would spend $62,000 over the life of that loan to pay back their debt.

Most times, discussions around the trends in student loans originate from a few places – at the Department of Education or from reports made by corporate student loan providers. But on the ground, its rare to hear much from student aid offices or from registrars.  It’s not that these places are buffeted by the student loan crisis, but that they are normally more strict about entering into the policy fray.  Their mission is to help students get loans.  They serve that motive and it generally stops there.

This is changing as more and more students encounter trouble, either in getting enough loans to pay for school, or in repaying their debt loads.

Some schools are finding that their students can’t put their hands on enough money to (more…)