Nelnet’s next federal student loan securitization is backed entirely by loans that were once behind on payments but are now current.

By comparison, just 19.5% of collateral for the servicer’s previous offering, in July, were rehabbed loans. And just 10% of the collateral for a May transaction were rehabbed.

In order to quality as rehabbed, the borrower must make at least nine consecutive payments on time, according to S&P Global Ratings. S&P expects rehabbed loans to default at a much higher rate than loans to borrowers who have never fallen behind on payments. In this case, S&P expects nearly half of the borrowers - between 47% and 49% to redefault. Nonetheless, the loans retain the initial pre-default 97%, 98%, or 100% guarantee by the guarantee agency and the Education Department.

By product, 70% of the collateral is consolidation loans, 28% Stafford loans, and 2% of Parent Loan for Undergraduate Students (PLUS) and Supplemental Loans for Students (SLS) loans.

The collateral is seasoned, with 78.3% of the pool in repayment status and generating cash flow. The remaining obligors are either in deferment (8.9%) or forbearance (12.8%).

A single, $539 million tranche of rated notes will be issued in the transaction, Nelnet Student Loan Trust 2017-3. S&P expects to assign a rating of AA+. RBC Capital Markets, BMO Capital Markets, Citigroup Global Market, and Jefferies are the underwriters.

The composition of the collateral is not the only change to the latest deal. The credit support is also structured differently. The initial overcollateralization supporting the notes decreased slightly to 3.43% of the initial adjusted pool balance from 3.49% for the series 2017-2 notes. The overcollateralization floor also decreased to 2.69% of the initial adjusted pool balance from 3.50% for the series 2017-2 notes.

However, the reserve fund for series 2017-3 will initially be larger, at 1.00% of the initial notes' balance at closing, and then step down to 0.25% of the outstanding notes' balance. By comparison, the reserve fund for series 2017-2 was fully funded at 0.25% of the initial notes' balance and must be maintained at 0.25% of the outstanding notes' balance.

Furthermore, series 2017-3 will start accelerating principal payment to the notes at the earlier of the November 2027 distribution date (approximately 10 years after issuance) or when the pool balance reaches 10% or less of the initial pool balance. The series 2017-2 will not accelerate principal payment to the notes until some 12 years after issuance or when the pool balance reaches 10% or less of the initial pool balance.

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