Moody’s Investors Service analysts said that they expect rehabilitated FFELP SLABs pools to experience a higher net loss rate versus pools of non-rehabilitated FFELP loans.

Moody's analysts said that even though rehabilitated FFELP loans have the same degree of federal guaranty and are probably going to have similar or lower net reject rates, this collateral type will probably default at a considerably higher rate compared with those that are non-rehabilitated.

Higher defaults negatively affect deals that depend on excess spread as a source of credit enhancement by shortening the offering's life. However, they actually are good for deals with negative excess spread.

Moody's analysts said that to address the different performance expectations for rehabilitated FFELP student loans, some of the cash flow assumptions used to analyze these deals are different from those of non-rehabilitated FFELP loan offerings.

A rehabilitated FFELP student loan is defined as one that a guarantor acquires after making a claim payment pursuant to a default. For a loan to achieve this status, the borrower must make at least 9 on-time payments in full to the guaranty agency, Moody's explained. 

The Higher Education Act, which determines the amount of government guarantees on FFELP SLABs, does not treat rehabilitated FFELP loans differently from those that are not.

The loan has the same federal benefits as the original loan, such as the same degree of federal guarantee, borrower interest rate, special allowance payment (SAP) rate, as well as deferment and forbearance provisions.

Rehabilitated FFELP loans typically do not earn any borrower benefits since these end when the loans first default.

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