NEW YORK--()--Fitch believes the "Pay as You Earn" income-based student loan repayment plan could have a positive impact on Federal Family Education Loan Program (FFELP) ABS portfolios. The program is designed to modify Federal Direct Loans and may reduce the financial pressure on some student loan borrowers that may also carry FFELP loans. We believe it is possible that the new program could help some borrowers avoid default on their other loans, including existing FFELP loans. We also believe this program could become more commonly used than the existing plan.
The Obama administration finalized the "Pay as You Earn" plan last month and it is expected to begin on Dec. 21. This plan will cap a borrower's monthly federal student loan repayment at 10% of the borrower's monthly discretionary income. It also will forgive any unpaid loan principle after 20 years of payments. Some studies of the effects predict the plan will benefit borrowers with high student loans and high incomes the most including professional students and graduate students. Eligible borrowers must have taken their first federal student loan on or after Oct. 1, 2007 and at least one Federal Direct Loan on or after Oct. 1, 2011.
We believe this plan will be more successful than the existing plan because the modifications are more meaningful. The existing plan caps repayment at 15% of monthly discretionary income and forgives remaining principle after 25 years of payments.
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