President Obama today will announce a series of additional steps to help Americans manage their student loan debt and make it easier for students to repay their loans. These measures are likely to affect prepayment rates on FFELP loans.
According to a report in the Associated Press, the plan would allow student borrowers to cap their loan repayments at 10% of their discretionary income starting 2012, instead of the previously projected 2014.
The plan would also help borrowers who have FFELP loans and a direct loan from the Department of Education to consolidate the debt into one loan from the government's direct loan program. This would reduce interest rates by up to a half percentage point less.
Approximately 5.8 million borrowers that have both direct and FFELP loans could be eligible for the program. Another 1.6 million borrowers can potentially be affected by the so called "pay-as-you-earn scheme" also being proposed.
Although it's not clear if FFELP consolidation loans are eligible for the new consolidation program or which borrowers will qualify for the 50 basis point interest rate reduction, prepayments on FFELP ABS are likely to increase, but only for those transactions collateralized by borrowers with FFELP and direct loans, Barclays Capital analysts stated in a report released late yesterday.
"Any pickup in prepays will be beneficial for discount dollar-priced FFELP student loan ABS (eg, 2010 and pre-2008 vintages) and detrimental to premium dollar-priced FFELP ABS (eg, 2008 transactions)," analysts said.