Student Loan Write-Offs Surge


NEW YORK (MainStreet) — Equifax, one of the nation's three major credit bureaus along with Experian and TransUnion, has found a steep rise in the write-off of student loans this year.

Between January and August of 2013, lenders wrote off $13.6 billion in student loan debt--private and federal--a 46% increase from the same period in 2012 and the peak amount at any point during the last eight years, according to Equifax data.

The totals are derived from the number of loans owed by people filing for bankruptcy or whose loans are in the collection process.

Mark Kantrowitz, vice president and publisher of Edvisor's Network, was skeptical of the Equifax data, which he questioned when it was used by the Federal Reserve Bank of New York in student loan research. "I don't trust Equifax data based on prior inaccuracies," he said. "$13.6 billion sounds a bit high." He stated that credit reporting agencies continue to treat some delinquent loans as though they were in default.

Kantrowitz pointed out that most of the default volume will be federal, since 90% of the loans come from the Department of Education.

"Private lenders like Sallie Mae have reported steady improvement in charge-off rates for the last few years," he said. "Keep in mind that most defaults on student loans occur within the first four to five years of repayment. So the FELP portfolio, which mostly ended with the introduction of ECASLA in 2008, has aged past the bulk of defaults."

ECASLA, the Ensuring Continued Access to Student Loans Act, gave the Department of Education new authority to purchase Federal Family Education Loan Program loans, in 2008. FELP was shut down in with the passage of the Health Care Education and Reconciliation Act of 2010.

"My guess is that the lenders will be reporting more improvements in their FELP loans, not deterioration," said Kantrowitz.

Amy Crews Cutts, chief economist at Equifax told American Banker that a recent increase in delinquent balances is consistent with an increase in overall student loan volume. Though the dollar amount of the delinquencies is up, student loans 60 or more days overdue have remained at around 6% to 8% of the total for last last eight years.

Banks have, for the most part, left the student loan business. Would a rise in write-offs mean that the student loan crisis is beginning to hurt the remaining private lenders? While the number of defaults are unacceptably high and are a blight on borrower credit scores--not to mention purchasing power--a study by MeasureOne, a San Francisco vendor that analyzes student loan data, found the private lenders to be in good health. Dan Feshbach, MeasureOne founder and chief executive officer, said in a statement to U.S. News & World Report last month that their findings show "the improving credit quality and repayment performance of the private student loans of the seven largest active lenders."

Sallie Mae, which makes about 50% of private loans, saw its stock increase by about 40% during 2013. In a December SEC filing the company announced a 2014 1Q dividend on its Series A preferred stock of 87 cents a share.

Discover Financial reached its 52 week high on December 31--$56.20 off a low $37.24. Zack's Equity Research cited "curbing interest rates" on student loans as a factor that should help drive the numbers of Discover Financial.

Wells Fargo has $22.4 billion in student loans on its books — not chump change — but only 1.5% of its total assets. It pays shareholders a 2.64% dividend of $1.20 per share.

Other private lenders include the First Marblehead Corporation, PNC Bank, RBS Citizens, and SunTrust Banks. When it comes to student loans, Uncle Sam is by far the biggest bag holder.

—Written by John Sandman for MainStreet

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