On Aug. 24, 2022, the federal government released a memo regarding student loan forgiveness. According to the statement, the Department of Education (DOE) will cancel up to $20,000 of student loan debt (per person) that is held by the DOE, subject to income caps (see "FACT SHEET: President Biden Announces Student Loan Relief for Borrowers Who Need It Most," published Aug. 24, 2022)(i). The proposed plan implies that borrowers of Direct Loans could benefit because these loans are held by the DOE; however, this large market segment (roughly $1.5 trillion outstanding) does not collateralize the asset-backed securities (ABS) rated by S&P Global Ratings. Rated ABS are backed by certain loans originated via the Federal Family Education Loan Program (FFELP), which ended at the completion of the 2009-2010 academic year. There is currently $219 billion in FFELP loans to about 10 million borrowers. Of this amount, $114 billion is in commercially held FFELP loans to about four million borrowers. It is this subset of loans that is most likely to be in ABS transactions.
The initial public statement made clear that FFELP loans held by the government could be eligible for forgiveness, while FFELP loans held by private commercial institutions would not be eligible. What was not initially clear is whether privately held FFELP student loans could become eligible for forgiveness once consolidated into Direct Loans. On Sept. 29, 2022, the DOE updated its Student Loan Debt Relief FAQ webpage(ii), revising its answer to the question: Are Federal Family Education Loan (FFEL) Program loans or Perkins Loans eligible for debt relief? According to the website, as of Sept. 29, 2022, borrowers with federal student loans not held by the DOE "cannot obtain one-time debt relief by consolidating those loans into Direct Loans." The website also states that borrowers with FFELP loans not held by the DOE, who have applied for consolidation before Sept. 29, 2022, "are eligible for one-time debt relief through the Direct Loan program".
If portions of FFELP student loans within ABS are forgiven, this process will act as a prepayment to the trust. Because prepayments typically reduce excess spread in the deal structures, there could be an impact on excess spread. However, because of the subordination and overcollateralization in ABS structures and the (minimum) 97% guarantee on FFELP loan collateral, rated tranches shouldn't be affected. Moreover, prepayments could offset liquidity issues in student loan ABS. This means that the extension risk that arises from income-based repayment plans could be mitigated through loan forgiveness. Therefore, to the extent that there are prepayments, the net effect on student loan ABS ratings is expected to be somewhat positive.
While some unknown and presumably small fraction of the commercially held FFELP loans may have already started to undergo consolidation into Direct Loans, most of this collateral is presumed to be ineligible for forgiveness. Although the government could revise its position in the future, it appears as though most student loan ABS will not be affected by the forgiveness program. Therefore, we don't expect the proposed student loan forgiveness program (in its current form) to have an impact on ABS ratings.
This report does not constitute a rating action.
|Primary Credit Analyst:||John Anglim, New York + 1 (212) 438 2385;|
|Research Contact:||Tom Schopflocher, New York + 1 (212) 438 6722;|
|Analytical Manager:||Kate R Scanlin, New York + 1 (212) 438 2002;|
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