The private student lending market may get a boost from the reset of the Stafford loan rate but that won’t necessarily lead to more securitization of these loans.
An April 16 report by Fitch Ratings noted that an expected doubling of the interest rate on federally subsidized student loans, to 6.8%, would open up new opportunities for private lenders to fill financing gaps.
At that rate, the products offered by for-profit private lenders – a market that is led Sallie Mae, Discover and Wells Fargo -- look relatively more attractive. According to the Fitch report, Sallie Mae starts fixed-rate loans for undergraduates start at a 5.74% annual percentage rate (APR) and at Discover starts its loans at a 6.79% APR. Their variable rates start at 2.25% APR and 3.25%, respectively.
Additionally, Fitch noted, neither lender charges origination fees, while the federal Stafford loan comes with an origination fee equal to 1% of the loan amount.
Others are skeptical as to how big a boost the Stafford rate reset will provide to private student lending, however.
Mark Kantrowitz, publisher of Fastweb.com and FinAid.org and author of Secrets to Winning a Scholarship, told ASR that, even at 6.8% fixed, the Stafford loans is still cheaper than the rates on most private student loans, at least over the long-term.
Kantrowitz disputes that rates on private student loans are quite as low as Fitch reports. And he said that even the best rates on private student loans aren't available to most borrowers. For-profit lenders have priced their loans with variable rates of 3.4% but only for their best credit customers; and at fixed rates of 7.89% and 6.79% just to “enable marketing claims.”
Private student loans also lack the repayment options available on Stafford loans, such as deferments, forbearances, income-based repayment, public service loan forgiveness, death and disability discharges, although some borrowers may overlook this.
So while the Stafford rate reset could very well lead to more originations or private student loans, "that doesn’t mean that it will lead to greater ABS activity,” the analyst said.
Kantrowitz said the slowdown in private student loan lending is not due to a lack of demand for these products. “Private student loan demand already exceeds the supply, but lenders are not relaxing credit underwriting criteria because they lack the capital to make more loans,” he said. “A lack of capital is limiting the availability of private student loans, both originations and refinancing.”
Sallie Mae is the only issuer that is securitizing at all. In March the lender issued its first subordinate private student loan ABS since 2007.
Sallie Mae’ $2 billion SLM Private Education Loan Trust 2013-A offered both fixed and floating rate tranches. The final pricing of on the ‘A2’/ ‘A’, 5.66 year class B, subordinate notes was 237.5 basis points over the interpolated swaps curve.