Student Lending Analytics Blog

ASA Cuts Staff By 17%; To Focus on Debt Management Services Going Forward

Tim Ranzetta — Tue, 10 Nov 2009 06:11:31 -0800

I picked up ASA's press release from NASFAA News this morning. It noted that the company will be focusing their efforts going forward on debt management services:

"In recent years, American Student Assistance has emerged as a leader in the student loan industry, providing education debt management services to 1.8 million student loan borrowers. Secondarily, we have supported our school and lender partners in the traditional Federal Family Education Loan origination processes.

Today, we have streamlined our operations and curtailed ancillary expenditures to position ourselves to continue to provide the critical service of higher education debt management, which we believe is, and will continue to be, the most pressing need of student loan borrowers."

SLA note: Among large guarantors (over 25,000 borrowers in repayment), ASA had the the second lowest cohort default rate for 2007 with a rate of 3.7%. For 2005 and 2006, ASA had the lowest cohort default rates among all guarantors with a rate of 1.5% and 1.4% respectively.

I suspect that staff reductions and consolidation will be a harbinger of things to come (if they haven't happened already) for the guarantor community, who have seen their business models negatively impacted first by the College Cost Reduction Act and then the ECASLA financing programs. With over 75% of FFEL loans sold to the Dept. of Education in 2008-09 through ECASLA, guarantors have seen a commensurate reduction in Loan Processing and Issuance Fees, which on a consolidated basis represented about 10% of the revenue for guarantors. With guarantor's guarantee portfolio basically going into run-off mode (given the minimal number of loans they will guarantee going forward), their other sources of income (e.g. collections and default aversion and loan maintenance fees) will feel the pinch over time.

DBRS Report Notes 66% Jump in Private Loan Defaults In 3Q

Tim Ranzetta — Mon, 09 Nov 2009 22:18:03 -0800

Here is their executive summary of the DBRS 3Q Private Student Loan Report, which tracks the performance of private student loan collateral backing 39 trusts:

The weak job market [SLA note: See post on weak employment numbers and defaults] and slow economic recovery continue to plague the private student loan ABS market. In the third quarter of 2009, performance of the private student loan collateral backing the 39 trusts that comprise the DBRS Private Student Loan Indices continued to deteriorate at a steady pace. Quarterly defaults spiked to record highs, while cumulative defaults continued to rise towards unexpected levels. Forbearance rates remained historically low [SLA note: Since SLM trusts make up over 50% of the index, their strategy over the last year of reducing forbearances has had a dramatic effect on the overall index] and delinquencies remained elevated.

The most significant third quarter observation is the jump in loan defaults by 66% over the second quarter. For the period of July through September, quarterly gross defaults represented 2.01% of loans in repayment, up from the second quarter mark of 1.36%. Some trusts experienced quarterly default rates as high as 4.0% for the quarter, which has some trusts pushing gross cumulative defaults into the mid-teens.

The graph illustrating cumulative defaults by trust vintage (on page 5 below) displays a notable trend in which every vintage is rising at a steady rate, with no signs of slowing. In the current economic environment, this trend is not surprising. However, presently the concern for ABS investors are answers to the questions of if and when does the slope of these default curves begin to decrease and how high will the levels of defaults ultimately reach vis-à-vis initial assumptions at which the ABS bonds were structured [SLA note: First Marblehead in June of this year updated their gross default assumptions to 19% from 9.38% two years ago]

Most of the vintages in the indices are substantially seasoned. However, each of the 2004, 2005, 2006 and 2007 vintages are performing roughly worse than their predecessors at the present time [SLA note: This 2004-07 period was referred to by Al Lord as "a bad lending bubble that occurred from 2004-2007 timeframe."] Further, the 2007 vintage especially contains some trusts with defaults tracking at or above the worst performance for all vintages. The graph on the next page shows the seasoning trend since the first quarter of 2008.

Given the relatively significant seasoning of the majority of the trusts in the index universe, defaults should continue to track closely to the performance of the U.S. economy, with an emphasis on employment conditions. Despite recent positive signs, in the event the recovery is slow and protracted, defaults will continue to climb as borrowers continue to struggle with employment and issues related to other debt burdens and real estate. Should the recovery be rapid and strong, defaults should abate. However, in either scenario, much damage has been done in terms of loan pools experiencing higher and faster defaults than most market participants expected. At this point in time, the question for many has shifted from whether performance will be worse than expected to how much worse it will get.

In their 3Q conference call, Sallie Mae noted that writeoffs declined during each month of the third quarter and they anticipate the 3Q will be their high-water mark for private loan write-offs.

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With the unemployment picture likely to be weak into 2010 and defaults likely to remain elevated, the ingredients for a resurgent secondary market are not in place yet.

Barron's Article Focuses Spotlight on For-Profits

Tim Ranzetta — Mon, 09 Nov 2009 21:34:56 -0800

On a day when many stock indices were up over 2%, four of the larger institutions in the for-profit education sector underperformed:

Symbol	Last Trade		Change		Volume	Related Info
APOL	4:00pm ET	55.88	0.11	0.20%	6,755,752	Chart, Messages, Key Stats, more...
DV	4:03pm ET	53.46	1.92	3.47%	2,272,416	Chart, Messages, Key Stats, more...
ESI	4:01pm ET	93.59	0.65	0.69%	1,162,308	Chart, Messages, Key Stats, more...
COCO	4:00pm ET	15.16	0.19	1.27%	4,783,445	Chart, Messages, Key Stats, more...

Why? Blame it on the Barron's article that ran over the weekend titled "Leveraging Up To Learn." Here were some of the highlights that seem to have attracted Wall Street's attention, but were probably not all the relevatory for readers of this blog:

On the subject of drop-out rates:

"And there's scarce evidence that these schools deliver a better education than America's traditional colleges. Education Department numbers show the industry's dropout rates are as miserably high as those at public universities. A Barron's analysis of the just-released data from 2008 shows a year-over-year dropout rate of 37% at the 1,350 for-profit colleges whose students got federal aid, the same level as 1,800 public colleges and well above the 29% dropout rate at the 1,760 nonprofit private colleges. (Students who fail to continue from the prior year are defined as dropouts.)"

Here is a link to the table with dropout rates by institution

What about loan defaults?:

"Defaults were about twice as high among for-profit alumni as among the alumni of public colleges, and three times the level of non-profit alumni -- according to the government numbers on those who started repayment in 2007. More worrisome, the Education Department says defaults of the for-profits' students get much worse over time, rising above 23% of individual loans after four years, compared with 10% for public college alumni and 7% for nonprofit alums."

Draws parallels with the housing crisis:

"This reminds me of the 'liar loans' that helped create the housing bubble," said California Democrat George Miller, chairman of the House Education and Labor Committee, at a hearing last month where government investigators told how a for-profit company's testers helped applicants pass an entrance exam. "They end up defaulting," fumed Miller, "with ruined credit reports, and all their problems got worse."

See this SLA Blog post for more eerie similarities with the subprime mortgage fiasco
See details on House hearing mentioned above here and here

Highlights several lawsuits filed by ex-employees regarding incentive compensation:

"Many for-profits have been sued by ex-employees who alleged the schools flouted federal restrictions on setting enrollment targets for the schools' recruiters. A complaint against Apollo, filed in a Phoenix federal court in 2003, described awards of travel and electronics to salespeople for hitting recruitment targets, and salary boosts of at least $50,000. A more recent complaint against Grand Canyon, filed in the same federal court in 2007, told of a ski trip to Lake Tahoe promised to sales reps who enrolled the most new students. Both schools deny violating the government's incentive-compensation rules and are in settlement discussions with plaintiffs. Under the Bush administration's Education Department, restrictions on recruiting were loosened in 2004. THOSE LEGAL SAFE HARBORS for the industry's recruiting practices are now under review by Obama's Education Department, in a public process called "negotiated rulemaking." An advisory panel met on the issue last week."

See this post about the history of incentive compensation and for-profit institutions
See this post for data showing that for-profit's share of the federal loan market is nearing a 20-year high

Indicates that Florida does a fine job of linking education and earnings data (I will look further into this in a later post):

"Only the state of Florida does a good job of linking education and earnings data that allows prospective students to see the average earnings of degree holders from the state's public colleges."

While it doesn't provide wage data, Minnesota does an admirable job of providing persistence, completion, related employment and licensure exam scores for their state universities.

FSA Posts Presentations For 2009 FSA Annual Conference

Tim Ranzetta — Mon, 09 Nov 2009 18:55:01 -0800

Here is a link to the presentations.

Nelnet 10-Q Provides Details on DL Servicing Contract and Another Whistleblower Suit

Tim Ranzetta — Mon, 09 Nov 2009 18:48:53 -0800

First the earnings report, which Wall Street cheered by pushing the stock higher by 7% to $15.64:

Nelnet (NYSE: NNI) today reported base net income of $50.2 million, or $1.01 per share, for the third quarter of 2009, compared with $23.4 million, or $0.47 per share, for the same quarter a year ago. For the first nine months of 2009, the company reported base net income of $113.5 million, or $2.30 per share, compared with $65.2 million, or $1.33 per share, for the first nine months of 2008. Base net income excludes discontinued operations, restructuring charges, and certain liquidity-related charges.

Here are a few of the highlights of the Nelnet 10-Q filed today:

Nelnet provided some additional details on the federal loan servicing contract which they were awarded with Sallie Mae, Great Lakes and AES/PHEAA (bold type below is provided for emphasis):

"The Company began servicing loans and recognized approximately $30,000 of revenue under this contract in September 2009. As of September 30, 2009 and October 31, 2009, the Company was servicing approximately $177 million and $2.5 billion, respectively, of loans under the Department’s servicing contract, which includes approximately $12 million and $740 million, respectively, of loans not previously serviced by the Company that were sold by third parties to the Department as part of the ECASLA Purchase Program."

Based on Secretary Duncan's recent letter, we know that the Department purchased $46.3 billion of FFEL loans through the ECASLA purchase program (see October 15th purchase report here). In their 3Q announcement, Sallie Mae noted that they were servicing $19 billion of loans as of October 15th or about 41% of the total (these are the loans that they originated that they retain servicing rights on). With Nelnet at $2.5 billion (or 5.%) that would suggest that AES/PHEAA and Great Lakes are splitting the other 54%. It also may mean that the allocation of these loans to the 4 servicers is continuing apace and Nelnet's share will increase. Might be a good question for analysts to ask on the earnings call tomorrow.

Nelnet does not expect student loan reform legislation to occur in 2009:

"The Senate is expected to begin its consideration of similar student loan reform legislation sometime in 2009; however, the debate will likely continue into 2010."

Both Nebraska Senators have been vocal in their support of the student loan community proposal.
- Here is Senator Ben Nelson's letter to Secretary Duncan sent last Friday: Download Nelson FFEL ltr Duncan 110609
- Here is news of Senator Johann's letter to Secretary Duncan sent on November 4th

Nelnet is waiting to hear back from Department of Education following program review, which found an initial finding of non-compliance with HEA's prohibited inducement provision (bold type below is provided for emphasis):

"On May 1, 2009, the Company received the Department’s preliminary program review report, which covered the Department’s review of the period from October 1, 2002 to September 30, 2007. The preliminary program review report contained certain initial findings of noncompliance with the Higher Education Act’s prohibited inducement provisions and required that the Company provide an explanation for the basis of the arrangements noted in the preliminary program review report. The Company has responded and provided an explanation of the arrangements noted in the Department of Education’s initial findings, and the Department of Education is expected to issue a final program review determination letter and advise the Company whether it intends to take any additional action. To the extent any findings are contained in a final letter, the additional action may include the assessment of fines or penalties, or the limitation, suspension, and termination of the Company’s participation in the FFELP."

New whistleblower suit was served to Nelnet in the last week:

On November 4, 2009, the Company was served with a Summons and Third Amended Complaint naming the Company as one of three defendants in an unrelated qui tam action brought by Rudy Vigil (the “Vigil Complaint”). This matter was filed under seal in the U.S. District Court for the District of Nebraska on July 11, 2007 and was unsealed on October 15, 2009 following the government’s notice that it declined to intervene in the matter [click here for complaint]. The Vigil Complaint, filed by a former employee of the Company, appears to allege that the Company engaged in false advertising and offered prohibited inducements to student loan borrowers in order to increase the Company’s loan holdings, and subsequently submitted false claims to the Department of Education in order to obtain special allowance payments and default claim payments on such loans.

Earlier this month, this post highlighted another whistleblower suit that had been brought against Nelnet (the "Oberg Complaint"
The company's stance on both cases is as follows: "The Company believes the allegations in both of the above matters to be frivolous and without merit and intends to vigorously defend the claims. However, the Company cannot currently predict the ultimate outcome of this matter or any liability which may result, which could have a material adverse effect on the Company's results of operations and financial condition."

In Case You Missed These Friday Posts...

Tim Ranzetta — Sun, 08 Nov 2009 20:58:14 -0800

More on the Bill To Create Private Student Loan Ombudsman Office

Tim Ranzetta — Sun, 08 Nov 2009 20:55:57 -0800

As posted on Friday, several senators introduced a bill to create an office of the Private Education Loan Ombudsman, in the Department of Treasury:

Sen. Sherrod Brown (D-OH), joined by U.S. Sens. Michael Bennet (D-CO), Al Franken (D-MN) and Barbara Mikulski (D-MD), today announced new legislation to help streamline assistance to Americans struggling with private student loan issues. The Private Education Loan Ombudsman Act, to be housed in the U.S. Department of Treasury, would help private student loan borrows address complaints or challenges by working colleges and universities and private lenders."

Check back here later in the week for the text of the bill, which was not available as of this evening. The press release from Senator Brown's office provided these additional details:

Purpose of the bill: "This bill would establish a federal private loan ombudsman to improve coordination and assistance for private student loan borrowers just as exists with federal student loans."
Described earlier formation of ombudsman office for federal student loans: "The 1998 Amendments to the Higher Education Act established the Student Loan Ombudsman, which serves as a centralized federal clearinghouse to help borrowers navigate disputes and problems with federal loans. The Student Loan Ombudsman has earned the support of borrowers and advocates alike. Currently, however, no such federal resource exists for private student loans borrowers."
Complaints would be reported to the Department of Education: "The Private Education Loan Ombudsman would coordinate services with the Department of Education and Federal Student Loan Ombudsman to ensure that all complaints and problems are reported. The federal body would also assist borrowers in mediating and settling disputes with private lenders.

Earlier this year, Senator Brown proposed a debt swap plan to allow borrowers to swap their private loans for federal loans for borrowers who had not exhausted their federal loan limits (see posts here and here). One wonders if one of the ombudsman's roles would be to help facilitate this debt-swap process, which could be challenging to administer. Also, should FFELP be eliminated through the legislative process, this could open up the possibility that lenders might aggressively market private loan products since they would no longer have a federal loan product to sell. I will keep my eyes out for both of these bills in the Senate bill that will be coming out of the Health, Education, Labor and Pension (HELP) committee sometime over the next few months.

What Are People Reading on the SLA Blog?

Tim Ranzetta — Sun, 08 Nov 2009 20:27:15 -0800

Visits were up 22% last week driven in part by the posts listed below. Here were the five most widely read posts from last week:

Note To Senate: Time For An Annual Reporting Requirement on The Federal Student Loan Program

Tim Ranzetta — Sun, 08 Nov 2009 19:57:25 -0800

As the US Senate considers a student aid reform bill, it strikes me that they may want to incorporate a requirement that the Department of Education produce on annual report on student lending. With the federal loan programs for 2008-09 nearing $84 billion/year and total outstanding federal student loans exceeding $550 billion, it seems high time that taxpayers demand more transparency to gauge how these loan programs are faring. Researchers shouldn't have to spend hours piecing together data from press releases, the President's Budget, collections reports, annual reports of publicly held companies, guarantor operating statements and myriad other sources to get an incomplete, disjointed picture of the program.

For a model, here is the report recently released by the Ministry of Education in New Zealand titled "Student Loan Scheme Annual Report 2009." Note the plain English, descriptive charts and financial statements within the report. With the House SAFRA legislation calling for the elimination of FFELP and for all schools to shift over to Direct Lending (Senate has not released a companion bill), the time is right to require an annual reporting requirement which includes financial statements and detailed repayment data (for example, can anyone answer the basic question of what percentage of federal loans are delinquent?), beyond the flawed cohort default rate. An annual report seems like a perfect opportunity to build some accountability into a student aid reform bill while ensuring that the taxpayer is receiving transparent information commensurate with their $550 billion investment to date. Who is going to step up?

Tuesday Webinar on "The Future of Student Loans: A Policy Dialogue"

Tim Ranzetta — Sun, 08 Nov 2009 19:04:15 -0800

For all you policy wonks out there, I came across this webinar announcement in an NSLP newsletter:

LEXINGTON INSTITUTE TO HOST NOVEMBER 10 WEBCAST ON FUTURE OF STUDENT LOANS
The Lexington Institute will host “The Future of Student Loans: A Policy Dialogue” on Tuesday, November 10 from 8:30 am to 10 am central time at the National Press Club in Washington, D.C.The event is available free by webcast. Contact Lisanne Boling by phone 703.522.5828 or e-mail to RSVP.

Confirmed speakers to date include:

Timothy A. Connell, President, Georgia Student Finance Commission
Donald Murphy, CEO and Managing Associate, The Wesley Peachtree Group
Eileen O’Leary, Executive Council, National Direct Loan Coalition, Stonehill College
John F. Remondi, Vice Chairman and CFO, Sallie Mae
Rich Williams, Higher Education Associate, U.S. PIRG

Questions to be addressed include:

Given the present economic conditions and regulatory structure, what federal policies will best serve the nation’s higher education students, institutions and taxpayers?
How will currently-proposed policy changes impact the delivery and taxpayer support of the $100 billion student loan system, and what effects can students expect?
What can postsecondary institutions do to safeguard the best interests of their students?

Send questions for the panel along with your name and location by e-mail.