The agreement reached in the Senate on federal student-loan interest rates will not have much of an impact on overall demand for these loans, even though it has an immediate effect of alleviating financial pressure on borrowers, according to Fitch Ratings in a note released today.
On July 10, senators agreed to link rates on federal student loans to market rates, specifically the yield on the ten-year Treasury. The agreement also imposes a rate cap — 8.25% for undergraduates and 9.25% for graduate students.
The agency said student borrowers will keep relying on federal student loans despite this shift towards market-based rates, as they are still expected to have more attractive terms than those in the private sector. Even if the difference between federal loan rates and private loan rates were to narrow, the former would still be better. As a result students will do what they have been doing: maxing out on their federal loan limits before turning to private sources of funding.
“Total private student originations grew roughly 3% in the 2011-2012 academic year, despite even lower interest rates on federal student loans and more stringent underwriting lenders,” the release said.
The Senate agreement was designed to deal with a doubling of the rates on federal student loans to 6.8% from 3.4% that kicked in on July 1. The Senate has not passed the new proposal to tie the rates to market instruments but Fitch does not anticipate problems with its approval.