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New risk in New Jersey student loan ABS: Repayment plan

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The New Jersey Higher Education Student Assistance Authority is making its annual trip to the securitization market with $217 million of student loan revenue bonds.

The collateral consists of formerly originated loans that will be transferred from the 2008 indenture around the time of deal closing and new loans that will be originated and acquired by the trust during the prefunding and recycling periods, which end on October 1, 2019, according to rating agency presale reports.

For the first time, investors will have to consider the risk that repayment could slow, extending the life of the bonds, as the result of a new repayment plan for newly originated loans. Borrowers in the state’s Household Income Affordable Repayment Plan have their maximum monthly payment reduced to 15% of the total of the household income of all of the parties to the loan that exceed 150% of the federal poverty guideline for their family size, with a minimum monthly payment of $25.

The repayment term for loans in the HIARP program will be extended to 25 years from the date of origination and any remaining balance at the end of those 25 years will be forgiven. The maximum dollar amount of loans that can be extended is $4 million calculated as unpaid principal balances at the time they enter HIARP.

In its presale report, Moody’s notes that the securitization trust will not only lose the entire principal balance of the loans that are forgiven, but will also not receive any recoveries on the forgiven amounts, as would have typically been the case for defaulted loans. However, loan forgiveness could partially be offset by lower defaults if borrowers using this program are able to take advantage of the reduced payments to work though their financial hardship and make the payments due on their loans.

That’s not the only potential risk, however. Proposed legislation that has been introduced as part of the 218th legislative session may blunt some of HESAA's recovery powers. Currently, the student loan authority has unique ability collection tools that result in higher recoveries on defaulted loans relative to other servicers. It can garner borrower wages starting at 90 days of delinquency, ) offset of state property tax rebates, state income tax refunds and other state payments to individuals, and withhold tuition aid grant awards of delinquent borrowers.

But senate bill 765 would require that HESAA obtains a court order prior to using some of its collection tools. Moody’s Investor Service noted that this bill was previously been introduced as part of 217th legislative session, but was not enacted into law and so had to be re-proposed in the current session.

On the plus side, the loans that will be transferred from the 2008 indenture to the trust around the time of deal closing have strong characteristics, per Moody’s. As of Jan. 31, 2018, the weighted average credit score at origination was 742. Most loans had co-borrowers or co-signers (91.4%). The loans are also highly seasoned, as borrowers have made 81 payments on a weighted average basis, and are already past their peak default periods, which typically occur three to five years after a borrower enters repayment.

Moody’s expects that the new loans that will be acquired by the trust during the prefunding and recycling periods will also have strong characteristics, similar to loans that have been acquired over the past five full academic years.

Despite the additional risks, Moody’s expects to assign an Aaa to 17 tranches of senior notes with maturities ranging from December 2018 to December 2035 and an A2 to a subordinate tranche maturing in December 2048. Those are the same ratings assigned to comparable tranches of its prior transaction completed in 2017.

The senior notes benefit from initial overcollateralization of 4.8% and subordination of 7.45%.

There is also a debt service reserve fund equal to the greater of 2% of the outstanding balance of bonds or $1 million.

Bank of America Merrill Lynch Securities is the underwriter.

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Student loan ABS