The SLABS market mostly ignored the recent negative headlines that included a legislative proposal allowing private student loans to be discharged in bankruptcy, Bank of America Merrill Lynch analysts stated in a report released late Friday.

They believe that the time is ripe to look into private student loan ABS, adding that a more positive view on private student loans falls in line with their view on other ABS asset classes.

The credit and supply trends and strong liquidity in autos and credit cards should support spreads and investors' desire for safe-haven assets. FFELP ABS should also benefit from the comparatively wide spread levels for high-quality collateral, analysts added.

The main headline affecting the student loan sector is Senators Dick Durbin (D-IL), Al Franken (D-MN), and Sheldon Whitehouse (D-IL) sponsoring the Fairness for Struggling Students Act (S1102).

If enacted, this proposal would remove the discharge exceptions for education loans except those that are made, insured, or guaranteed by a government agency. The Federal bankruptcy code lists various kinds of obligations that are not dischargeable in bankruptcy. By taking out the exception, existing and future private loans such as those made by nonprofit institutions can be dischargeable in bankruptcy. The Act would not remove the undue hardship clause that makes all education loans, including FFELP and Federal Direct Loan Program loans, dischargeable in bankruptcy.

The current concerns related to high college costs and student loan debt levels as well as borrower ability to pay can move the proposal further along in the legislative process compared with similar past proposals. This proposal came despite the improving environment for student loans: less bankruptcy filings, improving overall employment numbers, and stabilizing credit performance for some private student loan firms, analysts explained.

If the proposed changes to the bankruptcy code are enacted, BofA Merrill analysts expect higher bankruptcy-related charge-offs in private student loan portfolios, even though many factors should limit the numbers. Additionally, if the borrower filing for relief has other consumer debt, they predict more bankruptcy-related charge-offs in related portfolios since borrowers cannot select which debt is included in a bankruptcy proceeding. This includes FFELP loans, as notification of filing starts the claim process.

Another idea that has been proposed repeatedly is allowing borrowers to refinance private student loans into Federal student loans. In the most recent proposal, the Student Loans Forgiveness Act of 2012 (HR4170), Representative Yvette Clarke (D,NY-11) is proposing that certain borrowers with private student loans be able to refinance such loan into a consolidation loan under FDLP.

Analysts said that considering the current political environment, the passage of this proposal appears unlikely for this and other proposed legislation impacting student loans. This proposal also seems far reaching, they said.

The eligible criteria appears to allow a lot of recently graduated student loan borrowers to qualify. This would result in more funding needs and budgetary increases for the Department of Education (DoE). The ability of holders or beneficial owners of FFELP loans to tell the DoE that they wish to receive special allowance payments or SAP based on one-month Libor instead of three-month commercial paper rates ends April 1. Many, but not all, holders are likely to make the election.

Sallie Mae, Nelnet, and the Pennsylvania Higher Education Assistance Agency are among those holders that have said that they will make this election. If they have not already started the process, holders that need investor and/or other related party approvals, and/or rating agency confirmation on related FFELP ABS are running out of time. A final number on who makes the election will be known over 2Q11 as investor reports for related ABS are released, analysts said.

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