More than 200,000 students in the United States have defaulted on their loans, hit by high unemployment, and the ripple effects are now striking Wall Street. US college seniors, who graduate with more than $23,000 in debt on average, are defaulting in rising numbers and driving down issuance of bonds backed by student loans to the lowest level in more than a decade, Thomson Reuters data showed.
Rising defaults are expected to remain drags on bonds backed by private student loans. Lenders have been hit by the ending of the Federal Family Education Loan Program, or FFELP, in July, and Wall Street is in the midst of reorganising after the loss of the program.
Those loans had been available to parents of students who passed credit checks and are no longer available from private lenders. The loans are now directly managed by the US Department of Education under their direct loan program.
In a sign of a shift away from the business and perhaps bleaker prospects for student loan origination, Citigroup Inc said it would sell Student Loan Corp, in which it owns an 80 percent stake, to Discover Financial Service, for about $600 million.
"Consolidation was expected. FFELP has ended so there's no more origination going forward so it's essentially a discontinued business," said Amy Sze, an analyst at JP Morgan Securities.
As part of the deal, Student Loan will sell $28 billion of assets to Sallie Mae. Citibank NA also will buy about $8.7 billion of assets from Student Loan with an aim of reducing them over time.
Discover will end up with $4.2 billion of private student loan and related assets, which it is buying at a discount to their face value.
The Citigroup move comes as the default rate at for-profit schools climbed to 11.6 percent for students who were due to begin repaying loans in the 2008 fiscal year, the latest year for which data are available, versus 11 percent the previous year.
Student loan defaults increased to 6.0 percent from 5.9 percent, the US Department of Education said on Monday. Rating agency Moody's Investors Service has placed 27 classes of Sallie Mae's Private Credit Student Loan ABS on review for possible downgrade, affecting $4.4 billion of ABS paper. Moody's cited worse-than-expected credit performance for its latest action.
The student loans sector differs from other structured finance and ABS markets in which the brunt of defaults and credit deterioration has aleady hit, said Barbara Lambotte, senior credit officer at Moody's.