Breaking News
Ad-Free Version. Upgrade your experience. Save up to 40% More details

End of Student Loan Relief Poses Risk to Credit Card, Auto ABS

EconomyJul 30, 2021 01:00PM ET
Saved. See Saved Items.
This article has already been saved in your Saved Items
© Bloomberg. Students throw their mortarboards in the air during their graduation photograph at the University of Birmingham degree congregations on July 14, 2009 in Birmingham, England.

(Bloomberg) -- U.S. consumers will have to resume making payments on their Federal student loans when a Covid-related relief program expires on Sept. 30, and some borrowers may struggle to pay all their debts at that point.

That could spill over into bonds backed by private student loans, as well as auto loans and credit cards, which have performed unexpectedly well over the last year as Covid stimulus and debt relief programs have helped borrowers pay their bills, or skip payments.

The March 2020 CARES Act suspended payments and collections on defaulted federal student loans, and brought interest rates down to 0%. The program covers $1.5 trillion of federal student loans, which is about 94% of the total, according to Bank of America (NYSE:BAC).

When consumers have to resume making payments on federal student loans, there probably won’t be significant market disruption for bondholders, but investors need to be mindful of a bumpy road ahead, Bank of America analysts warn. Many borrowers have private loans for higher education in addition to federally backed debt.

“If someone has to restart their payments on high-balance federal student loans, it may put pressure on their overall finances -- including their private student loans -- which extends to other areas of consumer asset-backed securities, such as auto loans and credit cards,” said Theresa O’Neill, ABS strategist at Bank of America.

“As conditions normalize, the student loan market will likely see weaker credit performance as a relatively high number of federal student loan borrowers transition from non-repayment to repayment status,” O’Neill said.

To be sure, other factors may mitigate the possible negative performance.

“A lot of people have increased their savings over the past two years and that can serve as an added layer of protection should these programs expire,” Brian Wiele, head of securitized product syndicate at Barclays (LON:BARC), said in an interview.

Higher Delinquencies?

Several members of Congress are looking for President Biden to further extend the program until March 31, 2022. On Wednesday, Senate Majority Leader Chuck Schumer and progressive Senator Elizabeth Warren warned that the U.S. economic recovery could take a major hit if the Biden administration fails to extend the federal government’s pandemic moratorium on student-loan payments past September.

Read more: Canceled Student Loans May Be Boon For Bonds

Apart from the expiration of the CARES Act, there is the separate but related longer-term looming issue of whether the Biden administration will unilaterally cancel a large portion of student loan debt altogether. Members of Congress would like President Biden to enact some level of forgiveness by executive order, but he has conveyed that he’d rather do it through congressional legislation.

The U.S. student loan forgiveness that progressives in Congress are calling for may not be a bad thing for investors in bonds backed by that debt, because owners of those securities are getting paid high enough yields to compensate for any early principal payments that may result, Cantor Fitzgerald analysts said in March.

Relative Value: CMBS

  • Similar to RMBS, in CMBS the focus has shifted to rising prepayments eating into returns for premium dollar priced senior bonds and IOs, analysts Gunes Kulaligil, Mansoor Malbari, and Greg VanLear of Methodical Valuation and Advisory, a securitization-focused valuation firm, said in a Wednesday research note
  • Lower in the capital structure as the recovery takes hold, BBB- spreads are generally tighter than pre-Covid levels, “but we have yet to see some of this confidence to trickle into junior tranches of lodging and retail-heavy deals that we have been tracking since December”
  • While some offers are up 10-15 points, most are just about where they were in December; recovery this deep in the capital structure will be on a case-by-case basis, the analysts said


“Basically all securitization sectors have spreads at their 12-month or even multi-year lows,” said the Methodical Valuation and Advisory analysts. “Could spreads get even tighter from here? Sure, why not? Especially for more esoteric assets that trade on the periphery. Even after rates rose rapidly into the close of Q1, which has since partially subsided, we are still in a relatively low-rate environment and any meaninful yield pick-up that securitizations offer over other sectors will keep on attracting the usual suspects and the occasional new entrant.”

What’s Next

ABS deals in the queue for next week include US Auto (subprime auto), Textainer (container lease ABS), World Omni (prime auto), and DriveTime (subprime auto).

©2021 Bloomberg L.P.

End of Student Loan Relief Poses Risk to Credit Card, Auto ABS

Related Articles

Add a Comment

Comment Guidelines

We encourage you to use comments to engage with other users, share your perspective and ask questions of authors and each other. However, in order to maintain the high level of discourse we’ve all come to value and expect, please keep the following criteria in mind:  

  •            Enrich the conversation, don’t trash it.

  •           Stay focused and on track. Only post material that’s relevant to the topic being discussed. 

  •           Be respectful. Even negative opinions can be framed positively and diplomatically. Avoid profanity, slander or personal attacks directed at an author or another user. Racism, sexism and other forms of discrimination will not be tolerated.

  • Use standard writing style. Include punctuation and upper and lower cases. Comments that are written in all caps and contain excessive use of symbols will be removed.
  • NOTE: Spam and/or promotional messages and comments containing links will be removed. Phone numbers, email addresses, links to personal or business websites, Skype/Telegram/WhatsApp etc. addresses (including links to groups) will also be removed; self-promotional material or business-related solicitations or PR (ie, contact me for signals/advice etc.), and/or any other comment that contains personal contact specifcs or advertising will be removed as well. In addition, any of the above-mentioned violations may result in suspension of your account.
  • Doxxing. We do not allow any sharing of private or personal contact or other information about any individual or organization. This will result in immediate suspension of the commentor and his or her account.
  • Don’t monopolize the conversation. We appreciate passion and conviction, but we also strongly believe in giving everyone a chance to air their point of view. Therefore, in addition to civil interaction, we expect commenters to offer their opinions succinctly and thoughtfully, but not so repeatedly that others are annoyed or offended. If we receive complaints about individuals who take over a thread or forum, we reserve the right to ban them from the site, without recourse.
  • Only English comments will be allowed.

Perpetrators of spam or abuse will be deleted from the site and prohibited from future registration at’s discretion.

Write your thoughts here
Are you sure you want to delete this chart?
Post also to:
Replace the attached chart with a new chart ?
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Thanks for your comment. Please note that all comments are pending until approved by our moderators. It may therefore take some time before it appears on our website.
Are you sure you want to delete this chart?
Replace the attached chart with a new chart ?
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Add Chart to Comment
Confirm Block

Are you sure you want to block %USER_NAME%?

By doing so, you and %USER_NAME% will not be able to see any of each other's's posts.

%USER_NAME% was successfully added to your Block List

Since you’ve just unblocked this person, you must wait 48 hours before renewing the block.

Report this comment

I feel that this comment is:

Comment flagged

Thank You!

Your report has been sent to our moderators for review
Disclaimer: Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. All CFDs (stocks, indexes, futures) and Forex prices are not provided by exchanges but rather by market makers, and so prices may not be accurate and may differ from the actual market price, meaning prices are indicative and not appropriate for trading purposes. Therefore Fusion Media doesn`t bear any responsibility for any trading losses you might incur as a result of using this data.

Fusion Media or anyone involved with Fusion Media will not accept any liability for loss or damage as a result of reliance on the information including data, quotes, charts and buy/sell signals contained within this website. Please be fully informed regarding the risks and costs associated with trading the financial markets, it is one of the riskiest investment forms possible.
Continue with Google
Sign up with Email