NEW YORK--(BUSINESS WIRE)--Plans by private student lenders to help struggling borrowers by modifying their student loans will likely have only a limited impact on private student lenders and none on student loan ABS, Fitch Ratings says. However, portfolio yields and cash flows may be pressured if programs are expanded and modifications are offered to a broader subset of borrowers.
Last week the Wall Street Journal reported that Wells Fargo & Co. plans to lower interest rates and extend loans for approximately 600-1,000 student loan borrowers by the end of 2015. Discover Financial Services Inc. also plans to lower interest rates and may waive a portion of some borrowers' balances.
In the near term, Fitch expects private student loan ABS pools to be unaffected as Wells and Discover have not securitized their student loans. Private student lenders' profits will be only marginally impacted by these plans as the number of borrowers who may be eligible for modifications under the programs is small. At least initially, we believe the pool of eligible loans will be limited to delinquent accounts at an increased risk of default. Furthermore, we believe any downward pressure generated by a change in loan terms may be at least partly offset by incremental cash flows as some of the modified loans might otherwise have defaulted.
Longer term, private student lenders may elect to expand these programs to more borrowers, reflecting in part increased scrutiny from regulators, pressure from consumer advocacy groups and increased media exposure calling attention to mounting student loan debt. If loan modifications are extended to many more borrowers, ABS pools may need to address interest shortfalls while the profitability of bank student loan portfolios may come under pressure.
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