Fitch: Prepayment Spike Has Limited Impact on Student Loan ABS
The effects of a short-term White House plan intended to relieve some pressure on student borrowers are starting to surface in the student loan ABS sector. Fitch believes an uptick in consolidation pre-payments in some recent Federal Family Education Loan Program (FFELP) transactions is largely the result of students taking advantage of the Direct Loan Consolidation Program that President Obama invoked by executive authority in 2011. While difficult to quantify the full impact, we estimate the uptick was limited and may have resulted in a one-time increase in consolidation pre-payments to approximately 10% from current 1%-3%. In our view, a sustained increase at such level for several years would be needed to cause any meaningful negative impact on some of existing FFELP ABS ratings. We believe this scenario is unlikely as the program has ended.
Given the political environment and moderate participation in this program, we also believe that future consolidation programs will not be forthcoming soon. The U.S. Department of Education initially projected it could consolidate $38 billion in student loans and approximately $12 billion-$13 billion were consolidated under the program. In our view, the program faltered, in part, because it did not offer an incentive significant enough for borrowers to consolidate their loans. To make consolidations more attractive, taxpayers would likely need to shoulder some of the cost. With potential federal budget cuts and fiscal cliff pressures looming, we believe that this type of program will not be politically attractive in the near term.
President Obama invoked executive authority in 2011 to create the program, which was open for the first half of 2012. Legislation enacted in 2011 precluded the government from offering the interest-rate deduction as an incentive after July 1, 2012. It allowed borrowers to consolidate most student loans into one direct government loan, reduce the interest rate on their loan by up to .50%, access more flexible payments, and renew deferment. It was available to 5.8 million borrowers who had both Direct Loans and a Federal Family Education Loans.
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The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article, which may include hyperlinks to companies and current ratings, can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.
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