Student loan ABS performance is highly correlated with the economy
(Reuters) - (The following statement was released by the rating agency)
Still-rising college costs and the amount of U.S. student loans reaching an all-time high have created a college tuition bubble, though student loan ABS performance stands to actually improve over time, according to Fitch Ratings in a new report.
Outstanding student loans approached nearly $1 trillion at the end of last year, becoming the second largest source of consumer debt after mortgage loans. That said, student loan ABS performance is primed for a brighter outlook going forward. The primary reason, according to Managing Director Michael Dean, is the improving economy.
'Student loan ABS performance is highly correlated with the economy when it comes time for students to begin paying their college debt back,' said Dean. Not surprisingly, soaring unemployment during the credit crisis put performance into a tailspin with both federal and private loans seeing a jump in delinquencies and defaults. Flash forward to today's climate and the picture is notably different. 'Graduating students are entering an improving job market, which positions both federal and private student loan ABS programs for stronger performance,' said Dean.
While FFELP-backed ABS still benefits from the government support, interestingly enough it may be their historically more volatile counterpart that helps to drive improving performance overall. Post-crisis private student loan ABS are coming to market with much more credit enhancement and tighter underwriting on the underlying loans. It is also important to note that ABS compose a relatively small percentage of the student loan market overall.
'Less than 25% of the nearly $1 trillion in outstanding student loans is securitized and funded through the ABS market,' said Senior Director Tracy Wan. 'Additionally, many private student loan lenders are pulling out of the market, the less competition of which will help to preserve strong underwriting standards.'