The enactment of the Student Aid and Fiscal Responsibility Act of 2009 (SAFRA) would mean the elimination of the Federal Family Education Loan Program (FFELP), according to Bank of America/Merrill Lynch analysts.
FFELP lenders would no longer originate new loans, and would therefore no longer receive the revenue generated by such action. SAFRA, however, would employ the use of multiple servicers, which could ease the negative impact on FFELP participants.
Analysts predict that spreads will tighten on existing FFELP deals as they seek the safety of the dwindling market. Spreads on the program were already tightened by the Department of Education’s (DOE) College Cost Reduction and Assessment Act (CCRAA) and the Ensuring Continued Access to Student Loans Act (ECASLA), both of which significantly reduced the number of FFELP loans funded in the ABS market.
Under SAFRA, the DOE will utilize grant contracts under the Federal Direct Loan Program (FDLP), which analysts believe will be beneficial to both the companies awarded the contract, and the ABS market. Additionally, analysts anticipate that the DOE will choose companies who were already used as servicers through FFELP. The DOE is also required to consider state agencies and not-for-profit entities as servicers, ensuring that the market is not cornered by for-profit entities.
FFELP proposed changes to the program, rather than it’s complete elimination by SAFRA, which has already been passed by the House Education and Labor Committee. The proposal would create a new Federal loan program, the Competitive Federal Student Loan Program, and would issue entirely new Federal loans using the existing infrastructure. Loan providers would originate loans in much the same manner, but would then immediately provide funding using ECASLA programs.
BofA/Merrill analysts anticipate that the government will spend a fair amount of time considering both the SAFRA program and the proposed changes to FFELP before the Senate votes for SAFRA.
