Private Student Loans Research Articles

Default Risk and Private Student Loans: Implications for Higher Education Policies

In recent years, the proportion of students facing a binding constraint on government student loans has grown. This has led to substantially increased use of private loans as a supplementary source of finance for households’ higher education investment. A critical aspect of the private market for student loans is that loan terms must reflect students’ risk of default. College investment will therefore differ from a world in which government student loans, whose terms are not sensitive to credit risk, are expanded to no longer bind. Moreover, beyond simply crowding out private lending, expansions of the government student loan program will feed back into default risk on private loans. The goal of this paper is to provide a quantitative assessment of the likely effects of the private market for student loans on college enrollment. We build a model of college investment that reflects uninsured idiosyncratic risk and a well-defined life-cycle that is consistent with observed borrowing and default behavior across family income and college preparedness. We find that higher government borrowing limits increase college investment but lead to more default in the private market for student loans, while tuition subsides increase college investment and reduce default rates in the private market. Consequently, higher limits on government student loans have small negative welfare effects, while tuition subsidies increase aggregate welfare.

Factors Affecting the Student LoanABS Marketplace

The landscape for student loan asset-backed securities (SLABS) has been fundamentally transformed over the past several years. To depict the current state of the industry and short-term projections, this article provides a market overview and analysis of the political, economic, and regulatory factors affecting the asset class. Key topics discussed include the elimination of the Federal Family Education Loan Program; the William D. Ford Federal Direct Loan Program; private student loans; unique characteristics of nonprofit and state agency issuers; SLABS financing structures; evolving ratingagency influence; student loan legislation in the 112th Congress; and pertinent outcomes of the Dodd–Frank Act, such as the creation of the Consumer Financial Protection Bureau, increased oversight from the Securities and Exchange Commission, the authority of the Municipal Securities Rulemaking Board, and rules including the risk retention, municipal advisor, and Volcker rules. Importantly, through waves of legislation, regulations, new regulatory bodies, and the aftermath from the 2008 financial crisis, issuers and investors have adapted and maintained SLABS as an attractive asset class.

The Effects of Credit Status on College Attainment and College Completion

College students now use various forms of unsecured credit such as private student loans and credit cards to finance college. Access to these credit lines and the interest rates charged on these loans can vary significantly across credit scores. In this paper, we analyze if credit status, as measured by self-reported characteristics of an individual's credit standing, affects college investment. Using data from the Survey of Consumer Finances, we study a sample of young high school graduates to estimate how three different measures of credit status affect college attainment and completion rates. After correcting for selection and endogeneity issues, we find that credit status is more important the longer the student stays in college. For example, having bad credit significantly lowers the probability of completing a four-year college degree, but has a smaller (but significant) impact on attaining some college. We find robust evidence that credit status affects the intensive margin of college investment, but is less important for the extensive margin. Our results suggest that bad credit status, which lowers the availability of unsecured credit to finance college and thereby makes college investment more expensive, significantly reduces college completion rates.

Private Student Loan Financing in an Era of Needs and Challenges

As various industry participants whose business models focused on federally guaranteed student loans adjust to the elimination of private sector origination of these loans, some have focused their efforts on identifying opportunities in private student loans. This article explores the rapidly changing legislative and regulatory landscape affecting the student loan industry and describes the historical and current performance driven context in which private student lending has evolved. The authors detail how originators are developing new student loan products and how investment banks and specialty finance companies are creating innovative financing methods that are and may be used to securitize those products. The article also stresses the importance of enhanced servicing techniques and collection strategies for private student loans. <b>TOPICS:</b>Legal and regulatory issues for structured finance, credit risk management