Spokane Journal of Business

Lenders said not likely to fill student-loan funding gap

Private loan origination is expected to stay below pre-crisis level, Fitch says

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Fitch Ratings, of New York, says it expects the gap between rising U.S. college costs and available financing to continue expanding in future years as a result of static federal loan limits and ongoing congressional debate over fiscal spending cuts.

Private student lending likely will expand to fill part of the funding shortfall, but private loan origination volumes will remain well below their pre-crisis peak, given reduced lender participation and more challenging market liquidity, the company says.

Continued growth in average tuition costs and projected college enrollment levels both point to the need for greater funding availability from the public and private sectors, Fitch says. Total student aid has grown at a compound annual pace of 7.7 percent during the last 10 years, with the federal share reaching 73 percent of the total in the 2011-2012 academic year, up from 67 percent a decade earlier. Federal grants have supported a meaningful portion of that growth, but are likely more susceptible to government spending cuts.

Private student loan origination volume was $8.1 billion in the 2011-2012 academic year, compared with $7.9 billion a decade earlier, and was 68 percent below peak origination levels seen in 2007-2008.

Fitch expects origination volume to increase modestly in the coming year, but the exit of several large lenders combined with less market liquidity is expected to keep volume well below pre-crisis levels for some time.

Although federal student-loan default rates remain elevated and rising, credit quality for private student loans has steadily improved since 2009, given stronger credit profiles for those entering repayment. Tighter underwriting criteria after the crisis, which resulted in increased school certifications as well as higher co-signor rates and credit scores, have supported the better asset quality story for private lenders, Fitch says.

Prospective legislation leading to changes in the inability to discharge private student debt in bankruptcy remains a focus in the new congressional session.

While the fate of any bill remains uncertain given previous opposition in the House, Fitch says, it believes that any legislation of this kind would constrain credit availability further, as underwriting terms would tighten further and pricing would increase.

The impact of any change could be mitigated, to some extent, by the increase in parent co-signor rates on new loans, it says. However, the credit quality of legacy loans could deteriorate if "nondischargeability" provisions aren't grandfathered, it adds.

For a review of recent developments in the U.S. private student loan market, including Fitch's views on student financial aid sources, credit quality, regulation, prospective legislative changes, and the unique issues facing students attending for-profit institutions, see "Student Loan Industry: A Review Session," dated Jan. 30, 2013, atwww.fitchratings.com.

The above article is slightly revised from a version that originally appeared as a post on the Fitch Wire credit market commentary page.

Dual-headquartered in New York and London and with more than 50 offices worldwide, Fitch Ratings is a global rating agency.

It says it strives to provide value beyond ratings through independent and prospective credit opinions, research, and data.

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