The doubling of interest rates on new government guaranteed student loans could actually benefit some holders of bonds backed by existing loans, according to Fitch Ratings.
Interest rates on new subsidized Direct Stafford loans doubled today, to 6.8%, because Congress was unable to come up with a compromise before departing for the holiday last week, allowing a subsidy on the rate to expire.
The resulting rate increase will not directly impact any already issued Federal Family Education Loan Program (FFELP) student loans. But it could make it less likely that these loans will be repaid early when borrowers refinance, forcing investors to find someplace else to put their money to work.
Fitch said the higher rate is likely to discourage borrowers from taking out extra Direct Stafford loans to pay off their FFELP loans if they have both. (The FFELP program was discontinued in 2010.)
However, the Senate is still set to consider a bill to extend the current rate of 3.4% on Direct Stafford loans when it returns from recess.
A seperate bipartisan proposal was introduced in the Senate that would offer fixed rates at a spread over Treasuries for the life of the loan. In May, the House of Represenatives approved legislation to float new federal student loans interest rate with the 10-year Treasury note. Whatever agreement is reached will be applied retroactively to loans orginated on or after July 1, 2013, according to the Fitch.
Either proposal, especially the Senate's, would make it possible for students to get a lower interest rate on new Direct Stafford loans than they have on existing FFELP loans. So passage could motivate borrowers with both FFELP and Direct Stafford loans to refinance their FFELP loans.
This could result in a modest increase in prepayment in some FFELP ABS trusts, said Fitch.