Fitch Ratings views legislation in Washington aimed at making private student loans dischargeable in bankruptcy as a negative for lenders heavily concentrated in that product. While passage of bankruptcy reform isn't likely during a presidential election year, the issue is expected to remain a point of interest.
The Consumer Financial Protection Bureau, which has carved out a position as a private student loan ombudsman, estimates that student loan debt in the U.S. is more than $1 trillion, with more than $150 billion of that total in private loans. Default rates on the loans rose meaningfully during the crisis, and many are questioning the affordability of the product as private student loans aren't always accompanied by income-based repayment and forbearance options that come standard with federal loans.
We believe the ability to discharge private student loan debt in bankruptcy could yield higher loan pricing and/or a reduction in credit availability, as lenders would need to account for the added risk. Private student loans are already more expensive than federal products, and higher borrowing rates could have a big influence on a student's choice of college.
SLM Corp. is the leading provider of student loans in the U.S., and has said it would be supportive of bankruptcy reform concerning private student loans as long as borrowers have shown "good-faith effort to repay their student loans over a five- to seven-year period and still experience financial difficulty."
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