By Alan Rios, Head of Capital Markets
Why is underwriting important?
Credit risk assessment in the context of pilot training financing is a nuanced and relatively new process that follows a combination of traditional unsecured consumer finance underwriting and a novel approach to assessing a student’s progress through their schooling. The underwriting involves a detailed evaluation of the likelihood that a student will default on their loan which is particularly important given the substantial costs associated with pilot training (typically $80k – $100k). Moreover, the risk profile of student pilots often presents unique considerations that differ significantly from students who follow a traditional four-year college.
Recent Trends in Student Loan Underwriting
In recent years, modern lending institutions have shifted towards increasingly sophisticated, data-driven credit scoring models. These models represent a significant advancement over traditional assessment methods, utilizing a comprehensive range of data points to gauge an applicant’s creditworthiness. Key factors can include credit scores (e.g. FICO), employment status, income levels, assets/liabilities and educational background. Within the world of private student loans, a roughly $130 billion market, the majority of private lenders continue to rely on the requirement of a cosigner, especially for borrowers with limited credit history. In fact, more than 90% of undergraduate loans in the private sector are cosigned, indicating that lenders prioritize the creditworthiness of the cosigner rather than the student’s potential earnings or academic performance.
Pilot Training Underwriting
In the specific area of pilot training, underwriting models often incorporate additional, sector-specific factors. For instance, the success rate of the training program that the borrower is looking into, the physical health of the borrower, the weather trends of where the school resides, and the future employment prospects within the aviation industry are all critical considerations. From a business perspective, understanding market dynamics and macro-economic factors that might impact demand for air travel is also a major qualitative component of underwriting and adjusting certain requirements to qualify for a loan. A major underwriting focus for any specialty lender will of course be the state of the industry it’s lending in. For instance, if the borrower has a fantastic credit profile but faces an uncertain future in their chose career path, then there are risk considerations that cannot be managed at the borrower level. Some private credit funds in consumer finance have developed a variety of strategies to mitigate the inherent risks involved in private student lending. In the context of aviation training finance, these strategies are multifaceted and tailored to address the unique challenges of student pilot lending. Key approaches include:
- Requiring Co-signers: This approach adds an additional layer of security, ensuring that there is more than one party responsible for repaying the loan.
- Underwriting based on Current Financials: Evaluating the borrower’s existing financial situation to assess their ability to repay the loan. This approach contrasts with traditional methods that often consider the borrower’s potential future income after graduation.
- Partnerships with Flight Schools: By collaborating directly with flight schools, lenders can play a role in enhancing the quality and success rate of training programs, thereby improving employment outcomes for graduates.
Conclusion
Underwriting is a critical component of the financing process, especially in the context of high-cost, specialized education such as pilot training. This process involves a detailed assessment of the borrower’s credit risk, which is essential given the substantial financial commitments involved. For student pilots, who often face unique financial and career-related uncertainties, effective underwriting ensures that both lenders and borrowers are adequately protected. Underwriting plays a pivotal role in the sustainable growth and stability of the pilot training financing sector. By incorporating both traditional and innovative assessment methods, lenders can effectively manage risks, support aspiring pilots, and contribute to the overall health of the aviation industry.