Student loans

Stagflation and downward revision of maturity risk on US student loan ABS still in effect

As 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 downgrades. Fitch Ratings.

Between 2016, when Fitch began rating FFELP ABS on maturity risk, and June 30, 2022, three FFELP ABS transactions rated by Fitch defaulted.

Analysts have found that maturity risk amplifies when borrowers feel pressured to make payments. This risk “is more acute” for transactions with bonds maturing before the cancellation of the loan with repayment based on income (IBR), from 2035, wrote analysts Nicole Edwards, director of structured finance at the States. -United ; Alice Koo, Associate Director, US Structured Finance; and Sarah Repucci, senior director, Fitch wire credit policy – ​​research.

“A large student loan forgiveness can have significant implications for maturity risk in FFELP ABS,” the rating agency noted in its report, Regulatory Changes Could Reduce FFELP Student Loan ABS Maturity Risk.

During the pandemic, financial difficulties led to high levels of IBR adjustments on remaining loan terms, slowing prepayments from 4Q21, according to Fitch, “but IBR could resume amid tightening economy and the risk of stagflation”.

The widespread use of forbearance in 2020 facilitated a notable decline in the constant prepayment rate (CPR) and locked in the weighted average remaining loan term (WARTM) of the rated portfolio to maturity at around 166 months, the analysts wrote.

Moreover, the WARTM remained at the same level at the end of 1Q22.

Over the past nine months, the Public Service Loan Forgiveness Scheme (PSLF) rebate has increased CPR and payment speeds for FFELP ABS, Fitch observed.

The PSLF has been a key driver of CPR and payment speeds for ABS FFELP since October 2021, indicating “a broad student loan forgiveness would increase cash flow and bond amortization, but on a much larger scale” , the analysts wrote.

Debates over President Joseph Biden’s broad student loan cancellation proposal escalated in May 2022. loans held by the federal government”.