Income based repayment plans for student loans would help improve cashflows in student loan securitizations, industry sources say.
Rep. Tom Petri, R-Wis., on Monday, introduced legislation that would require employers to withhold payments from wages in the same way they do taxes. Under the plan, former students would repay their loans at rates determined by their income in any given year. If the borrower has a prosperous year, he or she would repay the loan more quickly. If the borrower makes very little, the repayment would automatically be stretched out -- with protections against negative amortization. Payments would be capped at 15 %of borrowers’ income after basic living expenses.
The proposal, said Petri, simplifies and improves student loans for borrowers while saving significant taxpayer dollars by establishing a robust income-based student loan repayment plan. “This will be great not only for former students, but for the taxpayers as well because always affordable loan repayments will be handled in a way that makes defaults much less likely,” he said.
Such income-based repayment programs, said securitization analysts at Citigroup in a report this week, would benefit private student loan performance by making more income available for repaying private student loans. It could also reduce the need for private student loan modifications.
"The legislation would make something similar to the current version of IBR mandatory for all borrowers, with payments made automatically through the tax withholding system," said Mark Kantrowitz, publisher of Fastweb.com and FinAid.org. "It would replace the 20/25 year forgiveness with a 50% cap on accrued student loan interest."
According to Moody's Investors Service Private Student Loan Indices, the default rate in private student loan ABS third-quarter 2012 was 4.2%, falling from 4.7% in the third quarter of 2011. The year-over-year improvement is similar to the previous quarter's, which was the first sizeable improvement since early 2011.
Also on the table is the "Pay as You Earn" (PAYER or ICR-A) income-based student loan repayment plan that would also boost cashflows to Federal Family Education Loan Program (FFELP) ABS portfolios. The repayment plan, available starting on Friday Dec. 21, is a new version of income-based repayment that reduces the monthly loan payment by a third and has forgiveness after 20 years in repayment instead of 25.
This plan caps the borrower's monthly federal student loan repayment at 10% of the borrower's monthly discretionary income. “We believe it is possible that the new program could help some borrowers avoid default on their other loans, including existing FFELP loans,” said analysts at Fitch Ratings.