Since critical federal student loan forgiveness legislation may or may not materialize, Federal Family Education Loan Program (FFELP) student loan ABS maturity risk remains the primary driver of Fitch Ratings downgrades.
Between 2016, when Fitch started rating FFELP ABS on maturity risk, and June 30, 2022, three Fitch-rated FFELP ABS transactions have defaulted.
Analysts found maturity risk amplifies when borrowers feel pressured to make payments. Such risk “is more acute” for transactions with bonds maturing prior to loan forgiveness with income-based repayment (IBR), starting in 2035, wrote analysts Nicole Edwards, director, US structured finance; Alice Koo, associate director, US structured finance; and Sarah Repucci, senior director, Fitch wire credit policy – research.
“Broad student loan forgiveness can have significant implications for maturity risk in FFELP ABS,” the rating agency noted in its report,
During the pandemic, financial hardship led to high levels of IBR adjustments to remaining loan terms slowing down prepayments beginning in 4Q21, according to Fitch, “but IBR could pick up against a backdrop of economic tightening and stagflation risk.”
The widespread use of forbearance in 2020 facilitated a notable decline in the constant prepayment rate (CPR) and stalled the rated portfolio’s weighted average remaining loan term (WARTM) to maturity, at approximately 166 months, analysts wrote.
Furthermore, the WARTM has remained at that same level as of the end of 1Q22.
Over the last nine months, forgiveness tied to the Public Service Loan Forgiveness (PSLF) program has increased CPR and payment speeds for FFELP ABS, Fitch observed.
The PSLF has been a key booster of CPR and payment speeds for FFELP ABS since October 2021, indicating “broad student loan forgiveness would increase cash flow and bond amortization, but on a much larger scale,” analysts wrote.
Debates over President Joseph Biden’s general student loan forgiveness proposal heated up in May 2022. The Biden administration reportedly aims to work out “some resolution on or before the scheduled Aug. 31, 2022 resumption of payment date for federally held loans.”
