New data showing that borrowers are using payments plans that allow them to either make smaller payments than they owe or forgo payments entirely has become an issue with a certain pool of federal student loans.
Up until 2010, these loans were originated by banks and private lenders. According MeasureOne, a company providing student loan data, nearly $159 billion of these loans back bonds. Because borrowers are still making payments on these loans, ratings firms that are reviewing the bonds have begun to downgrade them. A growing number of borrowers are either entering into reduced payments plans or have stopped making their payments on their loans entirely. This has caused concern that borrowers won’t pay off the loans by the time of the bond maturation.
These loans were originated by private lenders under the Federal Family Education Loan Program (FFELP). The government ended this program in 2010 and now all federal loans are originated by the Department of Education, which does not securitize the loans.
After reviewing $89 billion in loans, MeasureOne found that 14.3 percent of securitized FFELP loan dollars were in plans with reduced monthly payments. This is a big jump from 2.9 percent in 2011. Repayment plans usually lower monthly payments to 15 percent of the borrower’s income. This number does not include borrowers who have had their loans deferred and do not have to make any payments for up to three years. Nor does it include loans that are delinquent.
According to MeasureOne, 42 percent of loans securitized since 2010 fall into one of these three categories: borrowers with reduced payments, borrowers whose loans are in forbearance, and borrowers who have defaulted on their loans.
Moody’s Investors Service, which is a bond credit rating business of Moody’s Corporation, began downgrading bonds last month. To date, Moody’s has downgraded $3.9 billion of bonds administered by Navient Corporation. Navient Corporation is the largest servicer of student loans in the United States.
On the upside, Moody’s did confirm ratings on 3.4 billion of Navient bonds and upgraded $477 million. Moody’s also confirmed $823.7 million of J.P. Morgan bonds and upgraded $55.7 million.
In August, Fitch Ratings placed six Navient student loan trusts on a negative ratings watch. A negative ratings watch is a status that the credit-rating agencies give companies as they decide whether to lower that company’s credit rating. Fitch Ratings stated they expected to have the negative ratings watch resolved within three months.
In December 2015, at the request of bondholders, Navient began the process of extending the final maturity dates on $7.3 billion of FFELP bonds. This will add 54 years to the original maturity date. At a conference last month, Jack Remondi, the CEO of Navient, stated that the actions taken by the company should take care of the ratings issues.