July 12, 2013 / 12:36 PM / 4 years ago

RPT-Fitch: Limited impact via Senate deal on student loan rates

3 Min Read

July 12 (Reuters) - (The following statement was released by the rating agency)

Wednesday's Senate agreement regarding Federal Student loan rates is a positive development for student loan borrowers. However, Fitch Ratings believes the deal will have a limited impact on the competitive landscape and overall demand for student loans.

Fitch expects student borrowers will continue to rely on federal student loans (up to the maximum amount allowed) given their more attractive terms versus private loans, despite a potential move to market-based rates. Therefore, we would not expect the Senate's proposal to have a material impact on the overall demand for private student loans. In fact, total private student originations grew roughly 3% in the 2011-12 academic year, despite even lower interest rates on federal student loans and more stringent underwriting standards at private lenders.

Student loans remain a hot topic in Washington and the recent legislative gridlock surrounding interest rates on these loans is just another example of the continued interest among lawmakers in the market. Another topic of discussion relates to potential legislation that would change the dischargeability of private student loan debt. We do not expect final resolution on this topic in the near-term. However, even if it were implemented longer-term, Fitch believes the impact to private lenders could be partially offset by grandfathering existing loans and re-pricing new loans to account for the additional risk.

On July 10 the U.S. Senate reached an agreement which would link interest rates on federal student loans to prevailing market rates, specifically the 10-year U.S. Treasury yield. Although borrowing rates would vary from year to year, they would remain fixed for the life of the loan. The agreement also includes an interest rate cap (8.25% for undergraduates and 9.25% for graduate students), to protect borrowers if interest rates rise significantly.

Student loan interest rates recently doubled to 6.8% from 3.4% as lawmakers were unable to come to terms on an agreement prior to a July 1 deadline. However, the Senate proposal would be retroactive, enabling students who applied for loans after July 1 to benefit from the new rates. Although a vote has not yet been scheduled, Fitch expects the deal will eventually pass the Senate, be approved by the Republican-controlled House and signed by the White House. Our view is supported by the fact that the current agreement has bipartisan support as well as our belief that lawmakers may feel more compelled to compromise given that the July 1 deadline has already passed.

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