The expansion of the government’s Pay-As-You-Earn (PAYE) program for student loan borrowers will not make much of an impact on the performance of loans backing securitizations, according to a comment Tuesday by Fitch Ratings.
On Monday President Obama announced that his administration would relax a rule that restricted PAYE to only borrowers who started taking out loans in 2007 and took out their last loan in October 2011. The move could boost the number of eligible borrowers by as much as five million.
Presently, about 1.3 million borrowers with total debt of $72 billion are availing themselves of PAYE, said Fitch, citing U.S. Department of Education data.
Fitch said that if the plan brings in more borrowers, it would have only a marginal positive impact on the credit quality of Federal Family Education Loan (FFELP) collateral in student loan asset-backeds.
“FFELP borrowers would be able to consolidate their FFELP loans into direct consolidation loans and reduce their overall chances of default,” the agency said. “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.”
But in Fitch’s view the effect is too minor to cut defaults or raise prepayments in FFELP deals.
The agency expects delinquencies in the asset class to remain stable as the job market improves.