Over the next few years, the asset-backed market could see a significant rise in student loan ABS, following a change in the index used to calculate special allowance payments, said analysts and issuers.

Pending President Clinton's signature, the index for special allowance payments will be based on 90-day commercial paper plus a margin determined by loan type. The index is currently set to 91-day Treasury bills plus the relative margin.

"We don't comment on our future issuance, but switching to commercial paper index from a Treasury bill index makes any student loan lender's ability to fund student loan portfolios more reliable," said Guido van der Ven, assistant vice president at Sallie Mae.

"It will be easier for people to finance their portfolios because it will increase the stability of the Federal Family Education Loan Program," said Claire Mezzanote of Fitch IBCA. Fitch was the rating agency chosen by the U.S. Department of Education to participate in the Congress commissioned study of alternative indices for the special allowance payments.

Under this new legislation, borrower rates will still be based on the 91-day Treasurys; however, there is a borrower cap associated with that rate, explained Mezzanote. If interest rates rise above a certain level, then an issuer receives special allowance payments distributed by the department of education based on the new, less volatile CP rate.

"Whether people fund on balance sheet, or off balance sheet through securitization, it is more stable now, which is a good thing," said van der Ven.

"This ultimately can affect students access to loans, because if we can't fund them, they can't get them," he added.

If the bill is passed, all loans originated on or after Jan. 1 will be affected by the change in index; however, existing loans will not be affected.

"The impact is down the road at least a couple of years," said van der Ven. "Even loans we are buying into next year will be on a Treasury bill base, because they were originated before Jan. 1."

The liquidity in the Treasury bill market was affected by unexpected federal budget surplus in recent years, which contributed the current volatility in the T-bill interest rate.

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