CHICAGO--(BUSINESS WIRE)--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 market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.
ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.