Fitch: Scheduled Stafford Rate Reset Could Spur Private Lending
CHICAGO -- April 16, 2013
A potential doubling of the interest rate on federally subsidized student
loans, set to go into effect on July 1, could open up new opportunities for
private lenders to fill financing gaps, according to Fitch. While the rate
increase can be avoided if Congress acts to extend the current 3.4% rate for
subsidized Stafford loans offered to student borrowers with financial need,
failure to reach agreement may stimulate additional demand for private loans,
as private lenders are able to compete head-on with a 6.8% Stafford rate.
Due to the rising level of concern over student loan asset quality and the
potential headline risk of any additional increases in student borrowing
costs, some form of congressional compromise appears likely before the July
deadline. A rate reset would raise additional concerns over the affordability
of higher education and the mounting student debt load.
Still, the House and Senate remain divided on the issue.
Should the subsidized Stafford rate increase to 6.8%, rates on private loans
offered by large lenders, such as SLM Corporation and Discover Financial
Services, could become much more competitive, even with the lack of interest
accruals on subsidized Stafford loans for students still in school.
Fixed-rate loans for undergraduates start at a 5.74% annual percentage rate
(APR) at SLM and a 6.79% APR at Discover. Their variable rates start at 2.25%
APR and 3.25%, respectively. Additionally, neither lender charges origination
fees, while the federal Stafford loan comes with an origination fee equal to
1% of the loan amount. Still, repayment options can differ and must be
considered by students and parents when arranging education funding.
Either way, we expect the supply-demand imbalance to remain favorable for
large private lenders over the near term, as private-sector competition
diminishes and the government focuses on cost-cutting initiatives to narrow
the federal deficit.
An example of federal restraint can be seen in the White House budget for
fiscal year 2014, which does not call for any increase in Pell grants to
students. According to the College Board, Pell grants had grown by 172% (in
constant 2011 dollars) over the last decade. We believe declines in federal
funding, along with increases in tuition and enrollment, will support
increased demand for private student loans in coming years.
The above article originally appeared as a post on the Fitch Wire credit
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Meghan Neenan, CFA, +1 212-908-9121
Bill Warlick, +1 312 368-3141
70 W. Madison
Chicago, IL 60602
Brian Bertsch, +1 212-908-0549 (New York)
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