Student Loans Unfazed by Subprime Mortgage Mess

October 09 2007


Rating agency Moody's said in a recent report that it is not seeing problems in securities backed by private student loans similar to those backed by mortgages in the wake of subprime loan woes. Moody’s Investors Service reported it doesn’t see the problems in the subprime mortgage market impacting student loan asset backed securities (ABS).

Moody’s said it conducted the report due to concerns that private student loans, which lack the federal guarantee of the FFELP loans, could be impacted by the delinquencies and defaults that are plaguing the subprime mortgage market. Moody’s reports that private student loans accounted for $16.6 billion, or 20 percent, of student loan ABS that it rated in 2006.

The impact should be minor for several reasons including the lack of overlap of student loan borrowers and subprime mortgage borrowers; the average Fair Isaac Corp. FICO score private student loan borrowers ranges from 710 to 740, “significantly higher than the industry’s definition of subprime borrowers as those with a FICO score of 660 and lower,” according to the report from Moody’s analyst Barbara Lambotte.

In addition, more than half of the student loan borrowers have a co-signer who is legally bound to make payments on the loan. Finally, many of the borrowers of the loans are in school and not repaying the loan. Typically, their repayment of the loan isn’t impacted by today’s economy but the job market upon graduation.

Moody’s released “Current Performance in the U.S. Private Student Loan ABS Market Showing Little Influence from Subprime Mortgage Loans” last week.