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A letter report issued by the General Accounting Office with an abstract that begins "This report focuses on the default rate for student loans. Two major federal student loan programs, the Federal Direct Loan Program (FDLP) and the Federal Family Education Loan Program (FFELP), together provided student borrowers with about 9 million loans totaling about $42.9 billion in fiscal year 1999. The most recent student loan default rate statistics for schools showed that, overall, the direct and guaranteed student loan programs had similar default rates: at 6.6 percent for FDLP and 6.7 percent for FFELP. The two programs had similar default rates when the comparisons focused on the type of school. FDLP has two types of loans, consolidated and nonconsolidated. Generally, borrowers with consolidated loans who used the standard payment plan had a lower default rate than did borrowers with nonconsolidated loans. However, when income contingent repayment plans were used, borrowers with consolidated loans had a higher default rate than did those with nonconsolidated loans. The Department of Education uses various procedures to ensure that loans are properly serviced and collected, including independent monitoring and external assessments of monitoring results."

The expansion of income-driven repayment (IDR) plans has led to a Pyrrhic victory against student loan default. While IDR borrowers are unlikely to default on their loans outright, that has come at the cost of rising balances over time.
The post A Pyrrhic Victory Against Student Loan Default appeared first on American Enterprise Institute - AEI.

We present a theoretical model of moral hazard and adverse selection in an imperfectly competitive loans market that is suitable for application to Africa. The model allows for variation in both the level of contract enforcement (depending on the quality of governance) and the degree of market segmentation (depending on the level of ethnic fractionalization). The model predicts a specific form of non-linearity in the effects of these variables on the loan default rate. Empirical analysis using African panel data for 111 individual banks in 29 countries over 2000 - 2008 provides strong evidence for these predictions. Our results have important implications for the conditions under which policy reform will enhance financial development.

AbstractUsing contingent claims analysis, we study the impact of private guarantees on the default risk premiums or credit spreads of discount loans. Specifically, we analyze the reduction of the default risk premium on a new junior loan by obtaining the numerical estimates under a stochastic interest rate. We demonstrate how the value of credit enhancement relates to the profitability and size of the new junior loan, as well as the leverage, asset risk, and debt seniority of the borrowing firm and the private insurer. The main results show that (a) for the new junior loan, although the benefits of financial insurance are substantial with an AAA‐rated private insurer, in general, default risk premiums can only be reduced to a minute amount; and (b) even with complete insurance coverage from an AAA‐rated private insurer, loan issues command default risk premiums that reflect not only the intrinsic values and risks of the insured and the insurer, but also their covariance.RésuméNous examinons l'impact des garanties financières privées sur la structure de risque des taux d'intérêt des prêts escomptés en utilisant l'approche d'évaluation de Brennan (1979) et de Stapleton et Subrahmanyam (1984) qui n'impose pas la condition de perte et de gain nul sur les créanciers. Nous étudions également la réduction (ou augmentation) des primes de risque de défaut des dettes sous le régime de taux d'intérêt stochastique. Pour obtenir des résultats de statique comparée, des simulations numériques ont été entreprises. Les résultats confirment les évidences empiriques provenant du marché d'assurance (et de rehaussement de crédit) des obligations. Nous trouvons que les primes de défaut ne peuvent être éliminées complètement par des endosseurs privés donc vulnérables.

Student loan default has attracted considerable attention from journalists and the research community over the past several years, as the Department of Education projects that more than a quarter of federal student loans to undergraduates will end up in default at some point. But less commonly discussed are the pathways that student borrowers follow after defaulting on a federal loan. In this report, the authors combine a comprehensive review of federal policies surrounding default with an analysis of post-default pathways using a newly constructed federal data set of student borrowers. ; American Enterprise Institute

We show that loan origination time is crucial for bank lending standards over the credit cycle, as well as for ex-post loan-level defaults and bank-level failures. We use the credit register in Spain for the business loans over the 2002-15 period focusing on the time of a loan application and its granting. When VIX is low (proxying for good times) banks shorten the time to originate a loan, particularly to less-capitalized (riskier) firms. Bank moral hazard incentives are a key mechanism. Shorter loan origination time to ex-ante riskier firms in good times is especially stronger for: (i) banks with less capital (proxying for moral hazard problems between bank owners and taxpayers/debtholders); (ii) non-listed banks (proxying for moral hazard problems between bank management and shareholders); (iii) loans to firms in geographical areas which do not form the bank's main market and experience a real estate bubble (proxying for moral hazard problems between local loan officers and the bank headquarter), mainly if those areas have more bank competition; or, relatedly, stronger effects on loans granted to firms operating in industries which the bank is not most specialized at, proxying for moral hazard problems between different parts within the bank. Moreover, shorter origination time is associated with higher ex-post defaults at the loan-level, and aggregated at the bank-level, with higher likelihood of bank failure or other strong bank distress events, overall consistent with lower screening (time). ; This project has received funding from the European Research Council (ERC) under the European Union's Horizon 2020 research and innovation programme (grant agreement No 648398). Peydró also acknowledges financial support from the Spanish Ministry of Science and Innovation, through the Severo Ochoa Programme for Centres of Excellence in R&D (CEX2019-000915-S).

A letter report issued by the General Accounting Office with an abstract that begins "Pursuant to a congressional request, GAO reviewed the Department of Education's method of calculating a school's student loan default rate, focusing on: (1) whether there has been an increase in the number of borrowers who entered repayment but subsequently received deferments or forbearances; (2) what effect would excluding borrowers whose loans were in deferment or forbearance have on the most recent default rate calculation; and (3) whether additional schools would have exceeded the 25-percent default rate threshold under the alternative method of calculating the default rate."