Private student loan ABS should experience lower default rates and spreads could potentially tighten on some deals as a result of the implementation of the Bankruptcy Reform Act next Monday, according to Morgan Stanley researchers. Changes to the law and an expected decline in bankruptcies should combine to keep more loans in private student loan pools paying.
While under Chapter 7 bankruptcy, borrowers can be deemed exempt from paying most of their outstanding debt, the new law defines private student loans as non-dischargeable. Morgan Stanley feels that this change alone will mean fewer defaults. "Borrowers are actually going to be forced to pay back their student loans," said Kenneth Lee, analyst with Morgan Stanley. "This will have a direct impact on performance," he added.