Consumer Lending

Plan to expand PAYE student loan program may lower default risk

Education Money Student LoanFitch Ratings said last week that President Obama’s plan to expand the Pay as You Earn plan for student loan borrowers may lower default risk and boost prepayments in Federal Family Education Loan Program asset-backed security portfolios.

The Pay as You Earn program—launched last year—is designed to keep monthly student loan payments affordable for students as they enter repayment, which is capped at 10 percent of monthly discretionary income.

In order to qualify for the plan, student borrowers must have a partial financial hardship and must be new borrowers as of October 1, 2007. Borrowers also must have received a disbursement of a direct loan on or after October 1, 2011. After qualifying for the plan, borrowers may be able to continue to make payments under the plan even if they no longer have a partial financial hardship.

Under President Obama’s 2015 fiscal budget, the plan would be expanded to allow all federal student loan borrowers to access the program, regardless of when loans were originated, thereby dramatically increasing the number of borrowers eligible for the program.

“We believe the credit quality of the collateral pools in FFELP trusts would improve as borrowers who intend to take advantage of the PAYE would have higher overall chances of default,” Fitch Ratings said. “We also expect the expansion of this plan to marginally increase prepayments on FFELP trusts collateralized by loans originated prior to October 1, 2007.”

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