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WASHINGTON: Companies selling bonds backed by student debt have retreated from the market this year, as promises of loan forgiveness and higher rates deter borrowers from refinancing their loans.
The over-two-year freeze on federal student loan payments – which was extended again in April, relieving many borrowers – and the Biden Administration’s plan to formalise its long-awaited student-loan relief package has sent ripples across the private loan market this year, effectively diminishing it.
Student loan borrowers are hesitant to refinance their federal debt with private loans as long as the promise of forgiveness is dangling over their heads.
They have either held on to their federal loans or even paid down the private debt they owe after becoming flush with cash from Covid-era government stimulus cheques.
“It really doesn’t make sense for a federal borrower to refinance into a private student loan now,” said Theresa O’Neill, ABS strategist at BofA Securities.
As a result, the companies that provide that debt and then repackage it and sell it on as bonds in the asset-backed securities market have not had a lot to work with this year.,
Sales of student debt-backed bonds have sunk to less than one-third of their levels compared to this time last year, according to Bloomberg data.
So far, companies have only sold US$5.2bil (RM23bil) in student loan asset-backed securities (ABS) in 2022, as opposed to US$16.8bil (RM74bil) of issuance at this point in 2021.
“Because of the payment moratorium and the potential forgiveness, it’s affecting the refinancing space because there isn’t a lot of refi volume,” said Amy Sze, head of ABS research at JPMorgan, in a phone interview.
“Now that the payment moratorium has been extended, and it could be extended again, borrowers are less likely to refinance their loans.”
Higher interest rates – 4.99% on undergraduate loans for the 2022 to 2023 school year, up from 3.73% last year – plus wider spreads on deals are not helping issuers either, as they have helped push up borrowing costs in the ABS market.
In May, student loan servicer Navient Corp paid a 4.16% coupon on the largest tranche of a US$714.6mil (RM3.16bil) deal, having paid 1.58% on the same tranche of a similar deal just six months earlier in November.
Only Sallie Mae Bank and Navient have arranged more than one offering each since January, as fewer borrowers see an incentive to consolidate their federal debt in the private market.
The slow pace of bond sales has led some banks to slash their student loan issuance predictions by at least half.