Amid the political frenzy that seized the nation and culminated on election day last week, some investors expressed concern over what impact a Republican-led initiative to halt the creation of student loans with 9.5% floor payments would have on outstanding student loan ABS. However, investors' fears are unwarranted, according to a recent report from Morgan Stanley.
The 9.5% floor represents a minimum lender yield on student loans financed by eligible tax-exempt bonds issued before October 1993. Part of the yield comes from the rate charged borrowers, while the difference between the charged rate and the 9.5% floor is covered by the government with taxpayer dollars. Recent legislation passed by both houses of Congress would halt the origination of these loans for one year. However, the act is not retroactive, and should have no impact on outstanding student loan ABS. "Seeing as legislation does not call for retroactive actions, we do not believe ABS investors will be affected," Morgan Stanley analysts wrote in the report.