Nelnet plans to issue a $765 million Federal Family Education Loan Program (FFELP) loans-backed securitization that also includes 24.6% of rehabilitated loans.

Rehab FFELP loans are loans that had previously defaulted and were, subsequently, rehabilitated. The student loan borrower must make at least nine timely payments within a 10-month period before the loan is declared rehabilitated.

Although these loans exhibit much higher default rates than regular FFELP loans, they benefit from the same government guarantee as non-rehab FFELP loans.

Fitch Ratings has assigned preliminary ratings to the deal, Nelnet Student Loan Trust 2013-3. The capital structure will issue $745 million of ‘AAA’, class A notes and $20 million of ‘A+’ class B notes. RBC Capital Markets is lead underwriter on the deal.

Fitch said in the presale report that the credit quality of the trust collateral is high because of the guarantees provided by the U.S. Department of Education. Rehab loans may exhibit higher default rate but Fitch also highlights that there are certain features related to rehab loans that positively affect ABS transaction cash flows.  For example the loans exhibit a cumulatively reduced use of deferment, forbearance and borrower benefits.   

Nelnet provided Fitch with seven years of proprietary default information for rehab FFELP student loans. The weighted average borrower interest rate was 5.39%, and the average borrower indebtedness was $12,738. Of the student loans, 56.56% were originated on and after July 1, 2006, which entitles them to a 97% guaranteed reimbursement of principal and accrued interest.  


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