This report is intended to provide greater transparency into S&P Global Rating's approach to cash flow modeling as it relates to student loan amortization and stress assumptions. The examples provided are for illustrative purposes. The specific details and figures are hypothetical.
Frequently Asked Questions
What are the typical phases of a student loan life in your model?
We assume there are five phases in a typical student loan's life:
- School: The period before the eligible borrower's graduation or departure from school.
- Grace: The period between the eligible borrower's graduation or departure from school and the commencement of the repayment period (generally six months).
- Repayment: The period when the borrower makes interest and principal payments on the loans.
- Deferment: The period after repayment has begun when the eligible borrower may suspend full or partial interest and principal payments. Reasons for deferment include returning to school or entering the military.
- Forbearance: The period after repayment has begun when the eligible borrower may suspend full interest and principal payments. Reasons for forbearance include unemployment or other unanticipated financial or personal problems.
Our model assumes a typical student loan starts with school status and then grace status. After that, the loan is split into in repayment, deferment, and forbearance status, based on our assumptions (see chart).
What are the typical student loan payment types in your model?
Our model typically includes the following four student loan payment types:
- P&I deferral: The borrower makes no payment while in school or grace status, and the interest due is accrued.
- Interest only (IO): The borrower pays interest while in school or grace status. There are two subtypes: type 1 (no payment while in deferment status and the interest due is accrued) and type 2 (interest is paid while in deferment status).
- Fixed pay: The borrower pays a fixed dollar amount while in school or grace status, the payment reduces the interest due amount, and the remaining interest due is accrued. There are two subtypes: type 1 (no payment while in deferment status and the interest due is accrued) and type 2 (borrower pays a fixed dollar amount while in deferment status, the payment reduces the interest due amount, and the remaining interest due is accrued).
- P&I pay: The borrower pays full principal and interest payment while in school or grace status.
Regardless of loan payment type, the borrower typically makes no payment while in forbearance status and the interest due is accrued.
The table below shows payment behavior of these loan payment types. Note that from a modeling perspective, we don't treat school and grace statuses differently, since there is no difference in payment behaviors for loans during these periods.
| Loan payment types - examples | |||||
|---|---|---|---|---|---|
| Loan status | |||||
| Loan payment type | School | Grace | Repayment | Deferment | Forbearance |
| P&I deferral | No payment | No payment | Full P&I payment | No payment | No payment |
| IO (type 1) | Interest payment | Interest payment | Full P&I payment | No payment | No payment |
| IO (type 2) | interest payment | interest payment | Full P&I payment | Interest payment | No payment |
| Fixed pay (type 1) | Fixed interest payment (dollar amount) | Fixed interest payment (dollar amount) | Full P&I payment | No payment | No payment |
| Fixed pay (type 2) | Fixed interest payment (dollar amount) | Fixed interest payment (dollar amount) | Full P&I payment | Fixed interest payment (dollar amount) | No payment |
| P&I pay | Full P&I payment | Full P&I payment | Full P&I payment | No payment | No payment |
Is any adjustment applied to the first month loan principal and interest collection?
The first month interest collection is adjusted by counting the days from the pool cutoff date to the last day of the month. There is no adjustment for the first month scheduled principal and prepay principal.
| Adjustments to first month interest collection - example | |
|---|---|
| Pool cutoff date | April 25, 2024 |
| Loan interest rate | 5% |
| Loan balance | $1,000 |
| Resolution | |
| Days remaining in month | 30 - 25 = 5 |
| First month interest collection | ($1,000 x 5%)/12 x (5/30) = $0.69 |
Is any adjustment applied to current loan status?
For loans in deferment or forbearance status, we assume the loan enters repayment status in month 1 and apply our deferment and forbearance assumptions. For loans in school, grace, or repayment status, no adjustment is applied.
How do you treat accrued interest to be capitalized as of the pool cutoff date?
For loans in school or grace status, accrued interests to be capitalized as of the pool cutoff date are added to loan balance when the school and grace periods end. For loans in deferment or forbearance status, accrued interests to be capitalized as of the pool cutoff date are added to loan balance before cash flow projection (beginning of period 1).
| Accrued interest to be capitalized - examples | ||||||||
|---|---|---|---|---|---|---|---|---|
| Loan status | ||||||||
| School | Grace | Deferment | ||||||
| School remaining term | 10 months | - | - | |||||
| Grace remaining term | 6 months | 6 months | - | |||||
| Deferment remaining term | - | - | 20 mons. | |||||
| Accrued interest to be capitalized as of pool cutoff date | $20 | $20 | $20 | |||||
| Resolution | ||||||||
| Amount capitalized and added to loan balance | $20 (period 16)* | $20 (period 6)* | $20 (beginning of period 1) | |||||
| *Plus any additional interest accrued while in the school and grace statuses. | ||||||||
How are deferment and/or forbearance assumptions applied?
For loan in school or grace status, interests accrued during those periods are capitalized and added to loan balance at the end of school and grace periods. The deferment and forbearance balances are calculated based on the new loan balance with capitalized interest added.
| Deferment and forbearance assumption application for loans in school and grace status - examples | ||||||
|---|---|---|---|---|---|---|
| Loan status | ||||||
| School | Grace | |||||
| Loan balance | $1,000 | $1,000 | ||||
| School remaining term | 10 months | - | ||||
| Grace remaining term | 6 months | 6 months | ||||
| Accrued interest to be capitalized as of pool cutoff date | $20 | $20 | ||||
| Total additional interest accrued in school and grace status | $10 (period 1-16) | $10 (period 1-6) | ||||
| Deferment assumption | 20% of loan enters deferment for 48 months | 20% of loan enters deferment for 48 months | ||||
| Forbearance assumption | 10% of loan enters forbearance for 12 months | 10% of loan enters forbearance for 12 months | ||||
| Resolution | ||||||
| Loan balance(i) | $1,000 + $20 + $10 = $1,030 | $1,000 + $20 + $10 = $1,030 | ||||
| Deferment balance for 48 months | $1,030 x 20% = $206 (period 17-64) | $1,030 x 20% = $206 (period 7-54) | ||||
| Forbearance balance for 12 months | $1,030 x 10% = $103 (period 17-28) | $1,030 x 10% = $103 (period 7-18) | ||||
| (i)At the end of school and/or grace status. | ||||||
For loans in deferment or forbearance status, accrued interests to be capitalized as of pool cutoff date are capitalized and added to loan balance before cash flow projection. The deferment and forbearance balances are calculated based on the new loan balance with capitalized interest added. The deferment and forbearance remaining terms are replaced by our assumptions.
| Deferment and forbearance assumption application for loans in deferment and forbearance status - examples | ||||||
|---|---|---|---|---|---|---|
| Loan status | ||||||
| Deferment | Forbearance | |||||
| Loan balance | $1,000 | $1,000 | ||||
| Deferment remaining term | 20 months | - | ||||
| Forbearance remaining term | - | 6 months | ||||
| Accrued interest to be capitalized as of pool cutoff date | $20 | $20 | ||||
| Deferment assumption | 20% of loan enters deferment for 48 months | 20% of loan enters deferment for 48 months | ||||
| Forbearance assumption | 10% of loan enters forbearance for 12 months | 10% of loan enters forbearance for 12 months | ||||
| Resolution | ||||||
| Loan balance* | $1,000 + $20 = $1,020 | $1,000 + $20 = $1,020 | ||||
| Deferment balance for 48 months | $1,020 x 20% = $204 (period 1-48) | $1,020 x 20% = $204 (period 1-48) | ||||
| Forbearance balance for 12 months | $1,020 x 10% = $102 (period 1-12) | $1,020 x 10% = $102 (period 1-12) | ||||
| *Before cash flow projection. | ||||||
For loans in repayment status, the deferment and forbearance balances are calculated based on loan balance only.
| Deferment and forbearance assumption application for loans in repayment status - example | |
|---|---|
| Loan balance | $1,000 |
| P&I remaining term | 10 months |
| Deferment assumption | 20% of loan enters deferment for 48 months |
| Forbearance assumption | 10% of loan enters forbearance for 12 months |
| Resolution | |
| Deferment balance for 48 months | $1,000 x 20% = $200 (period 1-48) |
| Forbearance balance for 12 months | $1,000 x 10% = $100 (period 1-12) |
In which period does the model start applying default or prepayment assumptions?
The starting period for default or prepayment depends on the loan payment type (P&I deferral, IO, fixed pay, or P&I pay) and the current loan status (school, grace, repayment, deferment, or forbearance). We typically start default and prepayment assumptions on the date that any payment is due.
| Starting period for loans in default or prepayment status - examples | ||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Loan payment types | ||||||||||||||||
| P&I deferral | IO | Fixed pay | P&I pay | P&I deferral | IO type 2 (in deferment) | IO type 2 (in school) | ||||||||||
| School remaining term | 10 months | 10 months | - | 10 months | - | - | 10 months | |||||||||
| Grace remaining term | 6 months | 6 months | 6 months | 6 months | - | - | 6 months | |||||||||
| Deferment remaining term | - | - | - | - | 20 months | 20 months | - | |||||||||
| Deferment assumption | - | - | - | - | 20% of loan enters deferment for 48 months | 20% of loan enters deferment for 48 months | 20% of loan enters deferment for 48 months | |||||||||
| Forbearance assumption | - | - | - | - | - | - | 10% of loan enters forbearance for 12 months | |||||||||
| Resolution | ||||||||||||||||
| Loan starts default and prepayment | 100% (period 17)* | 100% (period 1)§ | 100% (period 1)† | 100% (period 1) ‡ | 20% (period 49)** | 100% (period 1)§§ | 100% (period 1)†† | |||||||||
| *P&I deferral while in school and grace status. The loan starts default and prepayment in period 17 when it goes into repayment status. §Interest only payment while in school and grace status. †Fixed dollar amount payment while in grace status. ‡Full P&I payment while in school and grace status. **The remaining 80% of the loan entering repayment status starts default and prepayment in period 1. §§80% of the loan enters repayment status and the remaining 20% of the loan entering deferment status is making IO payment. ††10% of the loan entering forbearance status stops default and prepayment starting in period 17 (the period after school and grace term end) for 12 months before resuming default and prepayment, since no payment is required when the loan goes into forbearance status. Note that 20% of the loan entering deferment doesn't stop default and prepayment, since the loan is making IO payments. P&I--Principal and interest. IO--Interest only. | ||||||||||||||||
Is the cumulative default rate assumption expressed as a percentage of the pool balance as of the pool cutoff date?
The cumulative default rate assumption is expressed as a percentage of the pool balance as the pool cutoff date plus total projected interest capitalized throughout the life of the deal (i.e., from period 1 to the end of cash flow projection).
| Cumulative default rate assumption - examples | |
|---|---|
| Pool balance as of cutoff date | $100,000,000 |
| Total projected capitalized interest from period 1 to the end of cash flow projection | $200,000 |
| Cumulative default rate | 10% |
| Resolution | |
| Total assumed default amount | ($100,000,000 + $200,000) x 10% = $10,020,000 |
How is the monthly default amount calculated?
The monthly default amount (MDA) is calculated using the following formula:
| Monthly default amount calculation - example | |
|---|---|
| Cumulative default rate | 50% |
| Five-year default curve (five-year annual default allocation) | 20%/20%/20%/20%/20% |
| Deferment assumption | 20% of loan enters deferment for 48 months |
| Forbearance assumption | 0% |
| Loan balance | $1,000 |
| Loan type | P&I deferral |
| Grace remaining term | 6 months |
| Capitalized interest at the end of grace status | $20 |
| Capitalized interest at the end of deferment status | $2 |
| Resolution | |
| MDA in grace status (period 1-6) | $0 |
| Loan balance at the end of grace status | $1,000 + $20 = $1,020 |
| Beginning repayment loan balance in period 7 | $1,020 x (100% - 20% - 0%) = $816 |
| Beginning deferment loan balance in period 7 | $1,020 x 20% = $204 |
| Five-year default curve last total 5 x 12 | 60 months |
| MDA for repayment loan for 60 months (period 7-66) | 816 x 50% x (20%/12) = $6.80 |
| MDA for deferment loan for 48 months (period 7-54) | $0 |
| Beginning deferment loan balance entering repayment in period 55 | $204 + $2 = $206 |
| MDA for deferment loan entering repayment for 60 months (period 55-114) | $206 x 50% x (20%/12) = $1.72 |
For the fixed pay loan payment type, the unpaid interests that are accrued and capitalized at the end of grace or deferment status may not experience the whole default curve because we start applying default on the date that any payment is due.
To achieve the targeted default assumption, our model may scale up default rate for a portion of the default curve.
| Monthly default amount calculation for the fixed pay loan payment type - example | ||||
|---|---|---|---|---|
| Cumulative default rate | 50% | |||
| Five-year default curve | 20%/20%/20%/20%/20% | |||
| Deferment assumption | 0% | |||
| Forbearance assumption | 0% | |||
| Original loan balance | $1,000 | |||
| Loan type | Fixed pay | |||
| School remaining team | 10 months | |||
| Grace remaining term | 6 months | |||
| Capitalized interest at the end of grace status | $20 | |||
| Resolution | ||||
| MDA in school and grace status (period 1-16) | $1,000 x 50% x (20%/12) = $8.33 | |||
| Default amount in school and grace status (period 1-16)* | $8.33 x $16 = $133.33 | |||
| Loan balance at the end of grace status | $1000 + $20 = $1,020 | |||
| Targeted default amount | $1,020 x 50% = $510 | |||
| Remaining default amount | $510 - $133.33 = $376.67 | |||
| Five-year default curve last total 5 x 12 | 60 months | |||
| Scaled-up default rate for the remaining 44 months (period 17-60) | $376.67/44 x 60/$1,020 = 50.36% | |||
| MDA for the remaining 44 months (period 17-60) | $1,020 x 50.36% x (20%/12) = $8.56 | |||
| *Since it is 16 months (10 months in school status and six months in grace status) into the five-year (60 months) default curve when accrued interests are capitalized and added to loan balance, the added loan balance (i.e., $20 capitalized interest) experiences only 44 months of the default curve. To achieve the targeted default amount, our model scales up the default rate for the remaining 44 months when the loan is in repayment status. | ||||
How is the monthly prepayment amount calculated?
Our prepayment assumption is provided as a conditional prepayment rate (CPR). To calculate the monthly prepayment amount, CPR is converted to a single monthly mortality (SMM) rate using the following formula:
The monthly prepayment amount is calculated using the following formula:
| Monthly prepayment calculation - example | |
|---|---|
| Prepayment rate | 5% CPR |
| Beginning performing loan balance of the period | $1,000 |
| Monthly scheduled principal | $7 |
| MDA | $5 |
| Resolution | |
| Convert 5% CPR to SMM | 1 - (1 – 5%)^(1/12) = 0.43% |
| Monthly prepayment amount | ($1,000 - $7 - $5) x 0.43% = $4.25 |
| Ending performing loan balance of the period | $1,000 - $7 - $5 - $4.25 = $983.75 |
This report does not constitute a rating action.
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