The Pennsylvania Higher Education Assistance Agency (PHEAA) plans to issue $646 million in securities backed  by a pool of Federal Family Education Loan Program (FFELP) loans, according to Fitch Ratings.

The trust will offer $631 million of ‘AAA’ rated, floating-rate, class A notes and $15.6 million of ‘B’ rated, class B notes.

All of the loans in the pool are benefit from guarantees provided by eligible guarantors and reinsurance provided by the U.S. Department of Education (ED) Federal. The trust is expected to consist of approximately 18% of rehabilitated FFELP loans.   Rehabilitated FFELP loans are loans that defaulted and were rehabilitated.

The student loan borrower must make at least nine timely payments in a 10-month period for the loan to be considered rehabilitated. These loans tend to exhibit much higher default rates than regular FFELP loans, although they benefit from the same government guarantee as non-rehabilitated FFELP loans. “In addition to the higher default rate, rehab loans exhibit a more front-loaded default curve compared to regular FFELP loans; both features are negative to the transaction’s cash flow,” according to the fish presale report.

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