KBRA Releases Research – Federal Student Loan Defaults and Securitized Consumer Credit

KBRA releases research on recent developments in federal student loan default collection policies and their likely impact on securitized consumer credit fundamentals.

The Department of Education (DOE) on April 21 announced it would resume collections on defaulted student loans starting May 5. Although the resumption of collections on defaulted federal student loans presents a clear headwind to consumer credit fundamentals, we do not anticipate a severe or widespread deterioration in the performance of securitized consumer credit, as we think it is unlikely that the Trump administration (vis-à-vis the DOE) would aggressively pursue collections at the expense of economic growth and stability, given that consumer spending represents around 70% of U.S. GDP.

However, some individual transactions may experience elevated credit stress, though the extent of the impact will depend largely on each collateral pool's exposure to affected borrowers, as well as the intensity of the DOE’s collection efforts and the effectiveness of its concurrent borrower support initiatives. While it is challenging to isolate the impact of the federal student loan default collections on other types of consumer credits—to the extend it manifests itself in an issuer’s performance data—it will be captured and reflected in KBRA’s cash flow scenarios.

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