Problem borrowers, at a greater risk of default, could exit Federal Family Education Loan Program (FFELP) ABS pools on the expansion of the “Pay As You Earn” plan.

President Obama has proposed expanding the plan to all qualified Federal Direct Loan Program borrowers, starting in 2015. Currently, the income contingent PAYE plan is available to borrowers that obtained their loans were new borrowers as of Oct. 1, 2007 and received a disbursement of a Direct Loan on or after Oct. 1, 2011.

The plan only applies to borrowers from the direct loan program, but FFELP borrowers could benefit by consolidating their FFELP loans into direct consolidation loans, Fitch Ratings said in a report published last week.

Fitch said that FFELP borrowers, currently in student loan pools, looking to consolidate their student loans are typically at greater risk of default. Removing these borrowers from the loan pool would improve the overall credit quality of these pools.

If the PAYE plan is expanded, prepayment rates for FFELP ABS could also experience a small increase. Fitch said that prepayments could pick up on, for example, FFELP trusts collateralized by loans originated prior to Oct. 1, 2007.

The current plan, put in place in early 2013, caps a borrower's monthly federal student loan repayment at 10% of the borrower's monthly discretionary income. It also forgives any unpaid loan principle after 20 years of qualifying payments, or 10 years for public service full-time employees. 

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