Why Should Self Manage Risk?

Why should SELF manage risk?

During the daily business, SELF faces certain risks to be examined here. The most serious risk SELF faces, is the risk of net loan write-offs or in other words a default on the student loan. This happens, when a former student is no longer able to repay the loan. Although the potential impact of the risk is rather high, the probability of this risk occurring is only at about 1.4% in average, which is, compared to the other risks SELF is exposed to, rather low. This default risk is driven by several factors in SELF’s old loan structure, namely the increasing amortization rates, the semi-annual payments, the variable interest rates and the large bullet payment at the end of the contract. Due to the recent change of the loan structure however the advantages and disadvantages on both sides have changed.

The second important risk that SELF faces is the risk of prepayment of the loan. One major reason for students prepaying their loan is that their costs of refinancing (i.e. the interest rate) have decreased and thus it is cheaper for them to exchange the SELF loan for a new one. This displays a risk for SELF, as they are no longer able to collect the interest rates from the students and instead are only able to invest payment they received at the now lower interest rate. However, if a student decides to prepay his loan, the risk of default is mitigated.

Another problem SELF faces with the new loan structure is the risk of mismatching interest rates. On the one hand, SELF receives a fixed interest rate from the students in the new loan structure of 9% p.a. which replaces the old variable interest rates which adapted twice a year, based on SELF’s weighted average cost of capital and a buffer zone for high interest rate fluctuations not to be passed on to the students. On the other hand, SELF has to pay a variable interest rate in order to refinance its debt. This