This year's T-Bill auction will boost student loan rates by 184 basis points, pushing the variable rate on FFELP loans to 4.84%, and Stafford loans originated to 6.54% during the in-school, deferment and grace periods, and to 7.14% during repayment status. Market watchers say the new rates will prompt a consolidation rush, and cause sharp prepayment speeds on outstanding FFELP deals in 2H06.

For its part, RBS Greenwich Capital says it expects outstanding FFELP deals to experience sharp increases in prepayment speeds in the second half of 2006, as they did the same period a year before. Driven by a rush to consolidate, prepayment speeds on Sallie Mae's FFELP transactions 2000-1 to 2005-2 climbed to 40 to 65 CPR the second and third quarters of 2005, up from 15 to 30 CPR in the first quarter.

Meanwhile, Merrill Lynch says that in-school consolidation should impact prepayments in the first half of this year but not prepayments in 3Q06. The firm added that it expects rates to slow on consolidation loans as a result of expectations of lower mortgage/consumer debt consolidation levels. This dip is due to higher interest rates and slower home price appreciation; fewer borrowers having the ability to obtain subsequent consolidation loans; and the growth of Stafford loans with 6.80% coupons, among other reasons.

As for those FFELP loans, Merrill Lynch said it expects to see an increase in prepayment speeds, especially as competition increases, but that they might not increase to levels seen in the Stafford/PLUS market.

(c) 2006 Asset Securitization Report and SourceMedia, Inc. All Rights Reserved.

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