Student Loan Refinance Market Expected to Rebound

The U.S. Supreme Court is expected to render its decision regarding the legality of President Biden’s loan forgiveness program by the end of June. If the program goes ahead as planned, borrowers with federal student loans will receive debt cancelations of up to $20,000. Additionally, federal student loan payments, which were frozen in March of 2020 because of the Coronavirus Disease (COVID-19) crisis, are expected to resume 60 days after the court’s ruling or after August.

-- The resumption of interest and principal payments should result in a significant portion of federal borrowers seeking more favorable terms via the private student loan refinance (Refi) market.

-- We expect the upcoming resolution of the legality of the forgiveness program to provide borrowers with more clarity about their federal student loan debt balances and obligations, which will further contribute to increased refinance activity.

-- The Refi asset-backed securities (ABS) market is expected to benefit from the increase in collateral eligible to securitize.

Higher interest rates make Refi loans significantly less attractive to borrowers because of the erosion of the value proposition between the rates on the loans that they currently hold, which may include private or federal student loans, and the latest rates offered by Refi lenders.

“However, as interest rates have increased, we have observed a significant supply of newly originated private student loans and federal loans that carry relatively high interest rates. These underlying borrowers are beginning to make up a large pipeline of potential customers that that the Refi lenders will target,” said Jon Riber, Senior Vice President, U.S. ABS. “With more than $100 billion of federal student loans originated per year, and the strong likelihood that the fixed interest rate for federal student loans disbursed for the next academic year (2023–24) will exceed the current rate, the addressable market of Refi borrowers should continue to grow,” said Riber.

“After nine consecutive Fed rate hikes starting in 2022, it’s not surprising to see the slowdown in Refi ABS volume because fewer borrowers were refinancing their student loans, thereby rendering a lower supply of underlying collateral for such securitizations,” said Stephanie Mah, Senior Vice President Structured Finance Research. However, if market conditions and general ABS investor sentiment improve, DBRS Morningstar anticipates a surge in Refi ABS new issuance volume.