Morgan Stanley introduced its new student loan ABS prepayment model last week, determining that some shorter student loan paper looks cheap versus longer dated supply. By using a different calculation of projected prepayment activity, the model provides a way of looking for value opportunities in the sector.

Examining historical prepayment rates across non-consolidation vintages from 1998 through 2004 and isolating three main explanatory variables, quarter-by-quarter seasonality, weighted average maturity and the Treasury bill rate, Morgan Stanley found that T-Bill rates are the primary driver of consolidation, rather than the T-Bill to WAC spread.

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