ABS student loans show delinquencies in first quarter, but do not raise alarm bells
Inflation and lack of federal pandemic stimulus aid could lead to an initial deterioration in the performance of US student loan asset-backed securities (SLABS) pools, but the effects should not be alarming in the long run. term, noted industry watchers in a recent study of SLABS performance.
ABS delinquencies from the Federal Family Education Loan Program (FFELP) increased during the first quarter of 2022, Fitch Ratings said in a May 18 update. Overdue payments over 30 days in March 2022 were 11.58%, compared to 10.17% in December and 8.52% in March 2021. Overdue payments over 60 days were 7.69% , compared to 6.43% in December and 5.54% in March 2021; the 90-day delinquency rate rose to 5.51% in March, from 4.47% in December 2021 and 3.89 in March 2021, according to Fitch.
Fitch analysts, however, insist that recent figures should not be cause for alarm.
“This is really just a normalization from the same time last year when most borrowers were on stimulus and forbearance, so they weren’t in default” , said Nicole Edwards, director of the ABS group of Fitch Ratings. “The use of forbearance at the start of the pandemic, combined with stimulus payments, has bolstered borrowers’ ability to pay and kept delinquencies and defaults low relative to historical numbers.”
Among private student loans, the 30-day delinquency rate was 3.47% at the end of the first quarter, up from 2.57% in the same period a year earlier.
Overdue payments of more than 60 days are up 1.82%, compared to 1.52% in December and 1.48% in the first quarter of 2021. Overdue payments of 90 days reached 0.99% in the first quarter, compared to 0.78% in December and 0.76% in the first quarter of last year.
Edwards said she expects a downward trend in delinquencies, similar to the increase in early-stage delinquencies in 2020, but says it could be tempered somewhat due to high inflation.
“Under these conditions, borrowers will have to prioritize spending and payment obligations, which will lead to an increase in borrowers in default,” Edwards said. “However, financially distressed borrowers do have payment options and so we will have to wait and see what happens with delinquencies and defaults.”
The trailing year steady default rate was 2.41% for the quarter, up from 2.17% in the last quarter of 2021, Fitch reported. Conversely, the trailing twelve-month principal repayment rate and the constant prepayment rate increased in the first quarter of this year, Fitch said.
Loan consolidation and borrowers applying for forgiveness under the Public Service Loan Forgiveness Program under the time-limited waiver, which allows pre-consolidation payments into the direct federal loan program have helped the increase, Fitch said.
Other industry professionals agree that student ABS shows increased delinquency rates, as well as prepayment pressures from certain government intervention programs.
BofA Global Research said in a report last month that its latest data showed delinquency rates had risen for private SLABS in school while abstention rates had fallen. He also noted that the U.S. Department of Education’s decision to move borrowers closer to the utility/income-based repayment waiver could put upward pressure on prepayments for FFELP ABS.
Theresa O’Neill, strategist at BofA Securities, says she sees some weakness in credit performance.
“In consumer debt, anything other than mortgage, we expect flat to weaker performance across most consumer sectors,” O’Neill said.
O’Neill said BofA expects refi student loans will likely see fairly stable credit performance.
Defaults on traditional private student loan asset-backed securities at school rose to 1.67% in the last quarter, from 1.57% in the fourth quarter of 2021, Fitch reported.
BofA also expects school ABS and FFELP to see moderately weaker performance, O’Neill said.
Looking ahead, everyday life becomes more expensive for students, with interest rates on student loans set to rise, not to mention inflation near a 40-year high of 8.3%, according to Jacob Channel, Senior Economist at LendingTree’s Student Loan Hero.