News Column

Fitch: Student Loan Refi Proposal Is A Risk for Private Lenders

May 9, 2014



NEW YORK--(BUSINESS WIRE)-- Proposed legislation to allow eligible student borrowers to refinance into lower rate loans is the latest example of evolving regulatory and legislative dynamics affecting the student loan industry, according to Fitch Ratings. The measure's potential ratings impact on student loan companies such as Navient and Discover appears manageable given that principal proceeds from loan refinancings would be available to repay outstanding debt obligations.

Passage of the legislation is unclear as it does not have bipartisan support (28 of 29 cosponsors are Democrats, 1 independent) and similar measures have failed previously.

The bill, S. 2292 or the "Bank on Students Emergency Loan Refinancing Act", offers a refinancing option under the Department of Education's (DOE) Direct Loan Program that would reduce servicing fees and interest income on existing loans held by institutions such as Navient and Discover.

Navient had approximately $18b ($12b FFELP loans and $6b private loans) of unencumbered loans and overcollateralization in existing securitizations and secured debt facilities at March 31, 2014. This compares to approximately $18b of outstanding unsecured debt and implies that, even in a scenario in which all loans are refinanced, Navient would have sufficient resources to repay existing senior unsecured debt. However, using repayment proceeds to purchase loans and/or to fund shareholder distributions would alter Navient's liquidity profile. The credit implications for Discover would be more limited, we believe, given that student loans account for a smaller mix of the company's overall loan portfolio (13% at March 31, 2014) and revenues (6% of gross revenues in 2013).

The proposed legislation would enable student loan borrowers to refinance eligible Federal Family Education Loans (FFEL), Federal Direct Student Loans (FDSL) and private student loans originated prior to July 1, 2013. Qualified student loan borrowers would be able to refinance into a lower cost fixed rate product depending on the type of student loan (e.g. undergraduate, graduate, PLUS). At today's rates, this would equate to 3.86% for undergraduate Stafford loans, 5.41% for graduate loans and 6.41% for PLUS loans. The borrower would pay an administrative fee equal to 50 bps of the outstanding loan balance. The proposal does not provide principal forgiveness, and all other terms and conditions would be the same as the original loan.

It remains unclear if the new rates (taking into account the admin fee) would persuade a substantial number of borrowers to participate in the program. Fitch believes qualified students with private student loans (and/or borrowers with less stellar credit histories) could benefit greatly given the higher cost of these loans. For example, some lenders currently offer fixed rate undergraduate private loans with APRs ranging from 6.74% to 10.99% and variable rate undergraduate loans ranging from 3.25% (Prime + 0.00%) to 8.25% (Prime plus 5.00%).

To participate in the program, students would also be subject to eligibility requirements which would be established by the DOE. Fitch believes such requirements could result in some adverse selection for holders of student loans as higher credit quality loans would be more likely to be refinanced. That said, higher credit quality loans typically have lower interest rates which may reduce the attractiveness of the refinancing program.

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.

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Fitch Ratings

Brendan Sheehy, +1 212-908-9138

Director

Financial Institutions

33 Whitehall St.

or

Matthew Noll, CFA, +1 212-908-0652

Senior Director

Fitch Wire

or

Media Relations, New York

Brian Bertsch, +1 212-908-0549

brian.bertsch@fitchratings.com

Source: Fitch Ratings


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