Bonds backed by federally guaranteed student loans will continue to pay interest even if Congress does not raise the federal debt limit, according to Moody’s Investors Service.
While the U.S. government’s cash payments Federal Family Education Loan Program securitizations could stall, these deals have sufficient liquidity to cover any temporary delays. That’s because the securitizations can use loan holders’ principal payments to cover interest due on the bonds. Moody’s estimates that cash from the government constitutes between 10% and 30% of the total cash a typical securitization receives.
Moreover, if a securitization uses loan principal to pay bond interest, its asset-to-liability ratio would not drop because the delayed reimbursements would accrue on the trust’s balance sheet until the DOE remits the reimbursements to the securitization.
Securitizations of private student loans, which are not guaranteed by the government, would not be affected.
Moody’s noted that the Department of Education has furloughed most of its employees because of the shutdown, which could delay the government’s cash payments to FFELP student loan securitizations. A failure by Congress to raise the debt limit could prolong the appropriation lapse.
Most of the cash the securitizations receive comes from the underlying FFELP loan holders; the government provides the rest. About 60% to 80% of the FFELP loans in the securitizations Moody’s rates are to borrowers in active repayment, meaning that they currently pay interest and principal on their loans. The remaining loans are to borrowers in school, in the six-month grace period after graduation, or in deferment or forbearance periods and therefore not required to make loan payments.
The DOE guarantees a minimum of 97% of defaulted loan principal and accrued interest, but monthly defaults for FFELP loan pools underlying the securitizations that Moody’s rates are currently only 0.3-1.0% of the pool balance of loans to borrowers in active repayment.
Furthermore, at current low interest rates, the securitizations do not rely heavily on the minimum floating rate of return that the DOE provides on FFELP loans; the interest rate the students pay on their loans generally exceeds the minimum guaranteed rate of return, and therefore the securitizations earn the higher borrower rate. The DOE also pays loan interest for borrowers of subsidized Stafford FFELP loans while the borrowers are in school, grace or deferment periods, but loans to these borrowers typically constitute at most 10% of the loans in the securitizations Moody’s rates.