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Business News/ News / World/  US student loans: High inflation, multi-decadal high unemployment rate may give stress to borrowers ahead
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US student loans: High inflation, multi-decadal high unemployment rate may give stress to borrowers ahead

US inflation eased slightly at 6.4% in January 2023 from the previous month's print of 6.5%. This is lesser than what the market had expected.
  • Meanwhile, the US unemployment rate has dropped to 3.4% --- which is the lowest jobless reading since May 1969.
  • S&P's note said, the private student loan refinancing transactions may be impacted by slower prepayments, higher inflation, and unemploymentPremium
    S&P's note said, the private student loan refinancing transactions may be impacted by slower prepayments, higher inflation, and unemployment

    The performance of student loans has been solid, however, borrowers are likely to face pressure from high inflation and a spike in unemployment in the United States. Although there is some cooling in US inflation however not enough to hold Federal Reserve back from raising interest rates. Meanwhile, currently, the country's unemployment rate is at a multi-decadal low.

    In the year 2022, S&P Global Rating made 120 upgrades of US student loans while making 540 affirmations and merely 21 downgrades. The total rated note balance in student loans was around $83.59 billion.

    In a research note, S&P said, "the U.S. student loan asset-backed securities (ABS) ratings performance in 2022 was stable. Loan performance in the private student loan (PSL) segment has been strong. Sticky inflation and forecasts for rising unemployment may disrupt the strong performance but the mostly high-investment-grade ABS ratings are supported by adequate credit enhancement that should be able to absorb some deterioration and remain stable."

    Further, the rating agency said, speculative-grade ratings in the PSL legacy (pre-2009) segment will likely be pressured further in a weakening economy.

    It pointed out that Federal Family Education Loan Program (FFELP) loan performance has been stable from a credit perspective due to the U.S. government's guarantee on the underlying collateral.

    But slower payment rates resulting from income-based repayment plans have impacted some FFELP student loan ABS ratings.

    In regards to private student loan in-school, S&P's note said, "transaction has been solid, but we anticipate some stress to borrowers if inflation remains high and unemployment increases."

    US inflation eased slightly at 6.4% in January 2023 from the previous month's print of 6.5%. This would be the lowest reading since October 2021, but lesser than what the market had expected.

    In the FOMC minutes, the policymakers said, "even so, participants agreed that, while there were recent signs that the cumulative effect of the Committee’s tightening of the stance of monetary the policy had begun to moderate inflationary pressures, inflation remained well above the Committee’s longer-run goal of 2% and the labor market remained very tight," adding, "contributing to continuing upward pressures on wages and prices."

    The US unemployment rate has dropped to 3.4% --- which is the lowest jobless reading since May 1969.

    Further, S&P's note said, the private student loan refinancing transactions may be impacted by slower prepayments, higher inflation, and unemployment, but solid loan performance, coupled with these borrowers' strong credit profiles, should allow for some deterioration without any impact on ratings.

    S&P expects the performance on these transactions--which are heavily co-signed and are high-investment-grade rated--to remain stable.

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    Published: 25 Feb 2023, 04:55 PM IST
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