NEW YORK--(BUSINESS WIRE)--The expansion of the Pay-As-You-Earn (PAYE) program remains too small to increase prepayments and reduce defaults in the Federal Family Education Loan Program (FFELP) trusts, says Fitch Ratings. Overall, we expect student loan trust delinquencies to be stable for the year as the modest improvement in job growth will likely continue.
An April report by the U.S. Department of Education showed that 1.3 million borrowers owing a total of $72 billion are using the version of PAYE that was available for borrowers who started their first loans after 2007 and borrowed as recently as October 2011. President Obama used executive authority to loosen that restriction yesterday. It could raise the number of eligible borrowers by as many as five million more.
If the plan is extended to more borrowers, we would expect a marginally positive impact on the credit quality of the collateral pools in FFELP trusts. FFELP borrowers would be able to consolidate their FFELP loans into direct consolidation loans and reduce their overall chances of default. Borrowers using PAYE tend to have a higher chance of default, and their consolidation into direct loans would leave the remaining trusts with better credit quality.
It has been reported that President Obama will also announce a plan for the Department of Education to renegotiate their agreements with federal loan servicers to help borrowers avoid delinquency or default. We will continue to monitor the outcome of that plan.
Additional information is available on www.fitchratings.com.
The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article, which may include hyperlinks to companies and current ratings, 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.