Student Debt Clock Hits $1 Trillion, Defaults Are Rising (CFPB), Moody's Downgrades Student Loan Revenue Bonds Guaranteed By Government

Source: (real-time update below)
FinAid's student debt clock is now over $1 trillion (see below). But, according to the Consumer Financial Protection Bureau in March, the total student debt balance (federal and private) hit $1 trillion several months ago.

Too Big to Fail: Student debt hits a trillion (by Rohit Chopra of CFPB, March 21, 2012)

"Our initial findings on the size of the private student loan market are sobering. When we add in the outstanding debt in the federal student loan program, it appears that outstanding student loan debt hit the trillion dollar mark several months ago – much larger than estimates from other recent reports. It seems that this market is too big to fail." 

Rohit Chopra was also interviewed by Kiplinger's magazine on May 7 and mentioned that student loan defaults were rising.

"Are most of the defaults on private student loans rather than government-backed loans?

We've seen defaults accelerate on student loans of all types. Defaults on private loans are more worrisome because many of those loans lack the protections of federal student loans, such as income-based repayment options, which cap payments based on income and family size for people who qualify."

Last but not least, Moody's downgraded $568 million of student loan revenue bonds that are guaranteed by the Department of Education to Ba1 from Aaa. It was related to the "negative excess spread" and higher interest rate and default rate scenarios.

Moody's downgrades 20 student loan revenue bonds issued by Mississippi Higher Education Assistance Corporation

Global Credit Research - 10 May 2012

Approximately $568.1 million of asset-backed securities affected

New York, May 10, 2012 -- Moody's Investors Service downgraded 20 classes of senior bonds issued by Mississippi Higher Education Assistance Corporation ("the Corporation") under a master indenture established as of July 1, 1999. The underlying collateral consists of a pool of Federal Family Education Loan Program (FFELP) student loans that are guaranteed by the Department of Education for a minimum of 97% of defaulted principal and accrued interest.


Moody's downgraded the bonds because of insufficient credit enhancement including overcollateralization, cash in the trust accounts and excess spread necessary to protect the investors against losses due to the negative excess spread generated in high interest rate cash flow scenarios. The application of high interest rate and higher default rates in various cash flow scenarios under the "Moody's Approach to Rating Securities Backed by FFELP Student Loans" methodology, published on April 2, also contributed to the downgrade of the senior bonds.

Negative excess spread erodes the collateral base by using principal collections to cover interest shortfalls, thus causing further reduction in excess spread."

Are there credit default swaps that hedge private sector student loan securitizations? Which hedge fund manager will be the Big EDU short? Could there be a student loan bailout?

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