A rise in consolidation prepayments in some recent Federal Family Education Loan Program (FFELP) loans that back student loan ABS deals is a result of students taking advantage of the Direct Loan Consolidation Program that President Barrack Obama invoked by executive authority in 2011.
According to a Fitch Ratings commentary released this morning,, this is likely just a one-time event and will therefore not have an immediate impact on the transactions. The consolidation prepayments rose to roughly 10% from current 1%-3%.
The program allowed borrowers to consolidate most student loans into one direct government loan, reduce the interest rate on their loan by up to 50%, access more flexible payments, and renew deferment. It was available to 5.8 million borrowers who had both Direct Loans and a Federal Family Education Loans.
"In our view, a sustained increase at such level for several years would be needed to cause any meaningful negative impact on some of existing FFELP ABS ratings," analysts said. "We believe this scenario is unlikely as the program has ended."
The agency also ventured further and said that its unlikely that future consolidation programs will follow soon. The U.S. Department of Education initially projected it could consolidate $38 billion in student loans and about $12 billion to $13 billion were consolidated under the program.
"In our view, the program faltered, in part, because it did not offer an incentive significant enough for borrowers to consolidate their loans," analysts said. "To make consolidations more attractive, taxpayers would likely need to shoulder some of the cost. With potential federal budget cuts and fiscal cliff pressures looming, we believe that this type of program will not be politically attractive in the near term."