A policy change proposed in the Obama administration 2012 budget request that includes provisions for Department of Education (DOE) programs could affect prepayment speeds in student loan ABS, a Deutsche Bank Securities report said.
Under the proposal, borrowers that hold both direct loans and FFELP student loans would be incentivized to convert existing loans into debt owed to the DOE. The 2012 budget proposal said that borrowers would be allowed to convert existing FFELP into DOE loans under the same terms and conditions of the borrower’s former loans. Those that choose to convert will receive a benefit of up to 2% of their loan balance.
According to Deutsche Bank analysts, the change would apply to roughly 6 million borrowers who have both types of loans or about 15% of the total FFELP universe.
"So while FFELP ABS prepayments would certainly increase if some form of this proposal went through, it would be limited in magnitude," Deutsche analysts said.
Still, the proposed change added further confusion to student loan ABS long-term prepayment speed assumptions.
"For an outstanding FFELP ABS bond, the impact of an increase in prepayment speeds would in most cases be positive," analysts said. "Particularly given today’s slow prepayment speeds many investors would be happy to get their full principal back ahead of schedule."