The student aid reform bill that President Obama signed today, while spelling the end of new originations of federal student loans by private student lenders, may also give providers of non-federal (or private loans) a sense that they have dodged a bullet (for now at least).
Why? The earlier SAFRA bill called for a significant $5 billion expansion of the Perkins loan program, which is a 5% loan provided to lower income students. While there were still some significant unanswered questions about the program including the degree to which schools might participate, an expansion of this low-interest loan program would have had a significant impact on reducing demand for private student loans.
There was also some question leading up to the bill's unveiling last week as to whether or not the debt swap bill sponsored by Senator Sherrod Brown (Dem-Ohio) would be included in the bill. This debt swap proposal would have provided private loan borrowers (current on their loans) the chance to swap out of these primarily variable-rate loans into fixed-rate unsub. Stafford loans. Borrowers would be allowed this opportunity only if they had capacity under the federal student loan caps (earlier research from Project on Student Debt found that about 2/3 of private loan borrowers in 2007-08 had not maximized their federal loan capacity). In the end, the final student aid reform bill didn't include a debt swap proposal nor is it clear where it stands on the Senate's agenda.
Finally, a Pell Grant that is expected to increase from $5,500 today to $5,975 in 2019 will clearly not keep up with tuition inflation so therefore the gap will continue to grow, which without a commensurate increase in federal loan limits will increase need for private student loans.
Whether these proposals resurface or the treatment of private student loans in bankruptcy is changed will determine the growth trajectory of this business going forward. Without any substantive legislative or regulatory change, I would expect the private student loan market to continue growing again in 2010-11 after a 50% drop in 2008-09 and a 24% drop forecast by SLA for 2009-10.
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