Monday evening TERI, the largest guarantor of private student loans, declared bankruptcy. The question is why and the answer is important to the future of private student lending. Technically they were forced to declare because they were downgraded below investment grade by Moody's which triggered covenants in their client agreements that amounted to a capital call they could not meet. What was the reason for the downgrade? Was it caused by a sharp rise in delinquencies that were outside the parameters of the rating agency models? If so, that is very bad news for every private loan provider and private loans will not be a viable asset class for securitization until the current portfolios are tested during an economic downturn( such as the one we are in).

The other possible reason was simply that TERI was terribly under-capitalized and unable to withstand any sort of rise in delinquencies and defaults even one that was within the parameters of agency models. If so, of course one would have to ask why they were rated higher in the first place.