Private SLABS to be Impacted by Recent Federal Student Loan Ruling by Supreme Court
Student LoansSummary
With the U.S. Supreme Court’s striking down of President Biden’s student loan forgiveness plan, his administration has countered with the Saving on a Valuable Education (SAVE) plan under the purview of the Secretary of Education’s authority under the Higher Education Act. In addition, approximately $39 billion in federal student loan debt will be forgiven by adjusting accounts to give borrowers credit for time spent in the income-driven repayment program. At the same time, after more than three years of pause, federal student loan borrowers will be required to resume making principal and interest payments this fall. DBRS Morningstar expects that traditional private student loan borrowers that also hold federal student loans will be adversely affected following the resumption of federal student loan payments:
-- Such holders will have a greater amount of overall student loan debt to service. Because a portion of federal student loan holders also hold at least one private student loan, private student loan asset-back securities (SLABS) may experience a period of moderate performance deterioration as borrowers attempt to reintegrate larger student loan payments into their monthly budgets.
-- DBRS Morningstar notes that these private student loan borrowers, especially those already struggling to cover other monthly expenses, may experience significant payment shock when federal student loan payments resume in October.
-- Heightened default risk within private SLABS will be somewhat mitigated by SAVE. The SAVE plan is a new form of federal student loan income-based repayment plan that offers significantly more generous terms than the existing federal student repayment plan.
“We expect that after federal student loan payments resume, struggling borrowers will likely choose to prioritize their private student loan payments over their federal student loan payments, further mitigating the risk of performance deterioration and payment shock in private SLABS,” said Jon Riber, Senior Vice President, ABS. This is because under SAVE, federal student loan borrowers will have a twelve-month on-ramp to repayment (from October 1, 2023, to September 30, 2024), which will protect them from being reported to the credit bureaus or referred to collection agencies because of delinquencies and defaults.
“Another looming issue is that the future credit scores of private student loan borrowers that also hold federal student loan debt may not necessarily be an accurate representation of the borrowers’ true credit standing, especially in cases where delinquencies and defaults on outstanding loans may have occurred during the on-ramp period,” said Stephanie Mah, Senior Vice President, Structured Finance Research. This may be compounded by federal stimulus measures as well as other loan deferrals that borrowers had already been afforded during the Coronavirus Disease (COVID-19) pandemic, both of which may have also bolstered credit profiles.
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