Education Lending: Market Momentum Heading into 2020

Time keeps on slipping into the future (well, at least since 1976), bringing with it momentum that has the power to shift markets. If we do our homework, we can see where the momentum will take us in 2020. 

Examining the Numbers

We’re ending 2019 as the land of rising debt. As we reported in September, by some accounts student loan debt has reached $1.6 trillion. Student loan ABS issuance reached $1.8 billion through October 2019, but overall is down 17.3% versus a year ago, according to SIFMA. According to Finsight, the decline in SLABS issuance is driven primarily by federal issuances.

As reported by the New York Fed, Q3 90+ day student loan delinquencies (10.9%) are higher than for credit cards, auto loans, and mortgages, but accounts transitioning to 90+ days delinquent are down slightly from Q2 (9.3% versus 9.9%). Based on information reported by DBRS, in 2019 within the various ABS segments, student loan refi delinquencies have remained low and stable; private loan delinquencies have trended down slightly and are expected to remain stable unless there is a major economic shift; and federal student loan delinquencies have trended up slightly, though still below last year.

State of the Debt Union

The size and growth of the overall debt and the level of delinquencies in a relatively strong economy have resulted in greater Congressional scrutiny. In September, the House Financial Services Committee held their first ever full committee hearing on student loans, where Congresswoman Maxine Waters called it a crisis that will ultimately “negatively affect our entire economy.”

The NY Fed provided a glimpse into the scope of the issue by studying differences in borrowing and repayment among high-income and low-income areas (based on ZIP codes). Not surprisingly, they found borrowers from less affluent areas struggle with repayment and delinquency rates are lower in higher income areas.

More quizzically though, the Fed also found that in high-income areas where there are higher balances, a significantly large share of balances are not declining. The Fed speculates that these borrowers may still be in school and deferring payments or simply on a repayment plan that does not tackle the increasing interest. It begs the question, however, whether we’ve reached a point where even successful, higher income students who have completed a degree are unable to keep up. If so, this is where those in high places will truly feel the burn from their wealthier constituents and start to mold a new reality.

The NY Fed issued another study to assess the impact of race on student loan balances and repayment (based again on ZIP code data given credit bureaus do not report loans with racial data). The research suggests Black-majority ZIP code areas have the highest and fastest growing balances, and balances are especially high when viewed in relation to income. The Fed also noted greater repayment struggles in Black and Hispanic-majority ZIP codes.

It seems apparent the pain of student debt is being felt across multiple demographics.

Alternative Courses

While radically sweeping debt erasure plans from Democratic candidates do not appear close to reality, sometimes you have to get to “maybe“ before you get to “yes.” Now, even a Republican has joined the fray, as A. Wayne Thompson the Department of Education’s Chief Strategy and Transformation Officer resigned and called for a mass loan forgiveness program. This move has kept hope alive for a bi-partisan solution.

In the past year, we’ve also seen how deeper dives into the issue have created a sharper understanding. There has been greater recognition that the impact of debt on individuals who haven’t finished their education programs and have limited prospects is more destructive than the overall student debt level. As The New York Times reported, defaulting borrowers tend to be older, nearly half never finished college and owe on average less than $10,000. But it has also been revealed that borrowers under income-driven repayment plans have balances that are as much as six times higher, indicating they completed their education. These findings may reflect both the widespread effect of the cost of education and perhaps that relief programs are not reaching the borrowers who need them most.

Servicers in the Hot Seat

Borrowers who need debt relief turn to servicers for information regarding available programs, but they’ve argued they don’t always get what they want or need. This, in turn, has placed servicers in the crosshairs of regulators and state attorneys general. For example, earlier this year, an Education Department audit found recurring problems at servicers based on their failure to comply with Federal student loan servicing requirements, including not correctly informing borrowers of repayment plan options and incorrectly calculating repayment amounts. Also this year, the New York Attorney General, Leticia James, sued Pennsylvania Higher Education Assistance Agency (also known as FedLoan) for problems related to loan forgiveness programs, miscalculated loan payments and income-driven repayment plans.

ISAs are Growing PDQ

Interest in Income Sharing Agreements has continued to grow. In September, Purdue University reported a record number of enrollees in their ISA program. Matchmaking services have sprung up to connect borrowers and investors. Questions remain, however, regarding such issues as tax treatment and preemption of state laws. A Senate bill introduced to address these concerns has not gained traction.

Turning the Page to 2020

Continued self-selection of higher quality pools should, in the short-term, limit the effect of the widely reported student debt “crisis” on the ABS market. In the long-term, however, if left unchecked, the effect of outsized individual debt burdens relative to income, prospects and other obligations, will significantly divert debt capacity from other areas, such as mortgages and auto loans. This could hinder economic growth and the macro-effects could trickle down to the ABS market in terms of deteriorating loan performance as borrowers struggle. The potential for such an indirect hit to loan performance is the greatest source of risk in the market, and its magnitude cannot be fully understood until the political landscape is settled (enabling a forecast of the severity of debt relief) and the economic outlook becomes clearer (indicating the employment prospects of borrowers and their ability to pay).

On a positive note, greater scrutiny should result in more informed analyses, which in turn, should foster a more savvy debate and lead to better debt relief ideas. A greater understanding of the causes of the explosive growth in student debt, could start to shift attention away from debt erasure plans, which are premised on tuition costs and student demand as the cause of the problem, to the supply of federal funds that allowed tuition to increase and absence of responsibility on the part of higher education institutions for the financial success of their students.

Nicole Serratore, an Attorney in the Insolvency, Creditors’ Rights & Financial Products Practice Group of Davis & Gilbert, contributed to this post.

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