Fitch: US Student Loan Servicer Consolidation Will Persist

Some smaller not for profit (NFP) student loan servicers will likely exit the sector while others will continue to merge with larger servicers, Fitch Ratings says. We believe this could result in short-term stress on certain student loan ABS trusts as the handoff between servicers would likely cause increases in delinquency.

This consolidation trend began in 2010 when the Federal Family Education Loan Program (FFELP) ended and accelerated when sequestration prevented six servicers from starting operations last year. In August the Department of Education (DOE) announced that it had renegotiated the terms of its student loan servicing contracts with these existing servicers. The allocations of new federal student accounts for the school year 2014-15 are TIVAS 75% and 7 Prime NFPs 25%.

Changes to the performance metrics that the DOE uses to determine the servicing allocation of federal student loans may benefit servicers with strong track records in customer satisfaction and default prevention. Some smaller NFP servicers may struggle on those bases without economies of scale in servicing. As the FFELP portfolio runs off, smaller NFPs that were not assigned any federal loan accounts may experience difficulty maintaining their businesses. Even smaller NFPs that have received a 100,000 account allocation will be challenged if they do not have enough other accounts in their portfolio to attain economies of scale.

Some NFP servicers have already chosen to exit the business by transferring their loans to other servicers, while others outsourced their day-to-day operations to bigger servicers. One example is Brazos adding Nelnet servicing as an approved sub-servicer in March for multiple trusts under its administration and transferring the servicing from a number of servicers to Nelnet.

Servicing transfer, even well managed, is often accompanied by an increase in delinquency and claim rejects. Although it introduces additional risk to FFELP ABS, these increases are usually short and small. As Fitch stresses both defaults and claim rejects in its rating process, we don't expect to see any rating impact due to servicing transfer.

Additional information is available on www.fitchratings.com.

The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article, which may include hyperlinks to companies and current ratings, can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.

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