Nelnet’s next offering of federally guaranteed student loan securitization has less exposure to borrowers who were once delinquent but are now making timely payments.

Just 16% of the collateral for the $522 million Nelnet Student Loan Trust 2018-2 consist of “rehabbed” Federal Family Education Loan Program loans, down from 51% of NelNet’s prior FFELP securitization, completed in March.

Rehabilitated FFELP loan pools typically have higher net loss rates than do pools of non-rehabilitated FFELP loans. Although the rehabilitated loans benefit from the same degree of federal guarantee – 97% of the defaulted principal and accrued interest – they are expected to default at a significantly higher rate than non-rehabilitated loans because the borrower has previously defaulted.

That’s why Moody’s Investors Service expects net losses over the life of the latest transaction to be just 0.35% of the principal balance, which is lower than its expectation for cumulative net losses of 1.15% for the prior transaction.

In other respects, the mix of collateral for the 2018-2 transaction is broadly similar to Nelnet’s prior four FFELP securitizations. By loan type, some 34.3% of the balance are Stafford loans, 63.5% are consolidation loans, and 2.2% are PLUS loans.

By loan status, 87.4% of the loans are in repayment (including 17.3% of borrowers who are in income based repayment plans, which can have very low monthly payments and extended terms); 6.4% are in forbearance; 6.1% are in deferment; and 0.1% of loans are to borrowers still in school. This last percentage is so low primarily because the federal government stopped making FFELP loans in 2010.

The average outstanding principal balance per borrower was $16,039, the weighted average borrower interest rate was 5.82%, and the weighted average remaining term to maturity was 148 months. The weighted average borrower age is 43 years.

Two tranches of floating-rate notes with preliminary Aaa ratings from Moody’s will be issued in the transaction: $190.7 million of Class A-1 notes and $320.5 million of Class A-2 notes. Both tranches have a final maturity of July 2066.

Credit enhancement consists primarily of overcollateralization: The balance of the collateral exceeds the balance of notes to be issued by $10.8 million, or 4%. There is also a reserve fund equal to 1.5% of the outstanding balance of the notes, though this steps down over time to as little as 0.1% of the initial note balance. And the excess spread, or the difference between interest received on the collateral and interest paid on the notes, is estimated to be in the range of 0.6% to 0.8% per year.

At the end of each distribution period, any funds left over after making interest and principal payments will be released to the holder of the most subordinate tranche of (unrated) securities issued in the transaction; however, after June 2025 any excess funds will instead be used to repay principal to the Class A noteholders.

RBC Capital Markets and BMO Capital Markets are the lead managers.

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