In a recent report, Bank of America Merrill Lynch analysts focused on the impact of the House of Representatives passing the Student Aid and Fiscal Responsibility Act of 2009 (SAFRA or HR 3221) by a vote of 253 to 171.

SAFRA moves to the Senate where, according to analysts, more debate and amendments are expected.

If SAFRA is enacted, starting July 1, 2010, all new federal student loans would be originated under the FDLP and not FFELP.

According to BofA Merrill, the terms of the loans originated under the Federal Direct Loan Program (FDLP) and FFELP are similar. However, the Department of Education (DOE) funds the FDLP loans  and not eligible lenders, BofA Merrill noted.

The removal of FFELP would end the new issue market for the government student loan ABS market, unless the DOE finds it desirable/necessary to sell FDLP loans.

"We believe such elimination would create scarcity value and, consequently, tighter spreads in the FFELP ABS market," BofA Merrill analysts said.

SAFRA's passage should not change the terms of existing FFELP loans and related ABS, even though the industry might see consolidation among existing servicers, analysts pointed out.

Compared with other consumer loan segments, analysts think such consolidation will cause minimal distributions since all lenders or servicers operate under a common set of rules (i.e., the Higher Education Act and related policies of the DOE).

Under SAFRA, existing FFELP participants, such as state and non-for-profit entities, will have an opportunity to expand or initiate participation in the FDLP as servicers via a competitive bidding process based on the ability to serve and educate borrowers as well as prevent loan defaults.

According to Rep. George Miller, chairman of the committee of education and labor, "private lenders have excelled in servicing loans to students — meaning ensuring that borrowers pay back loans on time, providing financial literacy, and helping prevent loan defaults."

Miller also indicated that SAFRA will forge a new public-private partnership that will offer all borrowers with the highest-quality customer service when repaying their loans and maintaining their jobs. 

BofA Merrill analysts noted that the DOE has already awarded contracts to four companies to service FFELP loans that will be sold to the DOE under the programs established by Ensuring Continued Access to Student Loans (ECASLA). Such loans are expected to reach at least $72.6 billion, according to President Obama's full-year 2010 budget.

FFELP lenders, via the America's Student Loan Providers (ASLP), have proposed an alternative to SAFRA. The Congressional Budget Office  has determined the industry's proposal would cost more than the FDLP.

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