Scholar Funding Trust  plans to issue the  $219 million student loan securitization, according to a Fitch Ratings presale report.

The single tranche offering will be rated 'AAA' by the ratings agency.   It will be backed by 100% rehabilitated Federal Family Education Loan Program (FFELP) loans.

After initially defaulting, rehabilitated loans are treated as a regular FFELP loan under the Higher Education Act once at least nine on-time payments in a 10-month period have been made. Fitch considers credit risk to be the key risk driver for rehab loans and assumes a 100% default rate at the ‘AAA’ rating for these loans.  

Fitch said that despite its projected  high gross default rate for rehab FFELP loans, the credit quality of the trust collateral is still high because of the guarantees provided by the transaction’s eligible guarantors and at least 97% reinsurance of principal and accrued interest provided by the U.S. Department of Education (ED).

The rating agency said in its student loan industry review for 1Q 2012 that rehabilitated FFLEP loans continue to make up a growing portion of FFELP collateral supporting many 2012 ABS transactions.

In 2011, Fitch rated three transactions  where rehab loans comprised 80%–100% of the student loan collateral. "Although, the percentage of rehab loans in any 2012 transaction has not exceeded 40%, more issuers are beginning to include rehab loans as collateral," said analysts. "Therefore, Fitch expects to see an increase in securitizations of these loans."



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