The Fitch Group announced this week that it believes fixed-rate private student loans just might be the answer to kick-starting the loan industry. The company, though, does temper this advice with the warning that competition from variable-rate private loans and fixed-rate government loans could be a stumbling block.
The Fitch Group is one of the "big three" credit rating agencies that control nearly all of the credit rating market. The company made its student loan proclamation on its Fitch Wire credit market commentary page, where it cited new fixed-rate private loan offers from Sallie Mae and Discover Financial Services as evidence that those types of loans can fuel loan growth. Sallie Mae's new loans are offered with interest rates ranging from 5.75% to 12.875%, depending on credit score. Discover's loans will be offered at a starting interest rate of 6.79% From the Fitch Wire statement:
These rates compare favorably to the 6.8% rate offered on a government Stafford unsubsidized student loan and the 7.9% rate offered on a government PLUS loan, both of which also come with origination fees. Additionally, while the new loans have a higher cost than the current 3.4% rate on government subsidized Stafford loans, that rate is scheduled to double, absent Congressional extension, to 6.8% on July 1, 2012 as part of the College Cost Reduction and Access Act of 2007.
This loan increase, which is distressing students, could make private loans very attractive in the future. There has been talk in congress, however, that student loan debt is so out of control that it might need to be waived for some students. Not even a bankruptcy can currently relieve a former student from student loan debt. Fitch warned in its message, though, that it believes pardoning student loans would inevitably increase the price of private loans.