The repeal of the single-holder rule for higher education loan borrowers is translating to a boost in prepayment speeds on student loan ABS, according to several market sources.
Earlier this month, President George W. Bush signed the Emergency Supplemental Appropriations Act for Defense, the Global War on Terror and Hurricane Recovery legislation. It included a provision that allows borrowers with several student loans to consolidate them with any lender they choose. Previously, borrowers were only allowed to consolidate loans with the same lender that provided the loans.
The repeal coincides with rising interest rates on higher education loans. Existing Stafford loans will now carry a rate of 7.14% on July 1, up from 5.30% last year. PLUS loans, typically granted to parents of undergraduate students, will go to 7.94%, compared to last year's rate of 6.10%. Also, new Stafford and PLUS loans issued on July 1, and after will have fixed rates of 6.8% and 8.5%, respectively, according to Fitch Ratings. Borrowers with significant balances have more incentive to consolidate their debt, because it might reduce their monthly payments by as much as 60%.
Trusts backed by consolidation loans have experienced a slight uptick, said Fitch Ratings. Prepayment speeds for Stafford and PLUS loans, meanwhile, have remained steady over the last six months.
"This uptick is not a result of increased claims, but die to borrowers finding alternative means to finance their debt," said Fitch Ratings. The repealed single-holder rule might result in increased prepayments for Stafford and PLUS loans, as borrowers take advantage of more loan consolidation options.
Over the long term, consolidation will slow down as incentive to do so dissipates and the percentage of fixed-rate student loans increases, according to Juliet Jones, an associate director at Barclays Capital. Such an occurrence may have a stabilizing effect on prepayment rates going forward.
"We still anticipate some consolidation loan volume, albeit at lower levels," Jones said. "Some borrowers may still use this option to lower their monthly payments."
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