NEW YORK--(BUSINESS WIRE)--The decline in voluntary prepayments has increased extension risk for Federal Family Education Loan Program (FFELP) student loan ABS transactions, Fitch Ratings says. Unless prepayment picks up or issuers come to the rescue, some FFELP transactions could miss their legal final maturities, resulting in technical defaults.
The main driver of the extension risk is that actual prepayment rates are lower than initial expectations. Fitch will address this issue on a case-by-case basis. In the event of technical default, we would expect ultimate repayment of full principal and interest afterward.
Some issuers are addressing the problem by writing in amendments to allow for more discretion in the optional call. For example, in January, servicing agreement amendments allowed Navient Solutions to make optional purchases of up to 10% of the initial pool balance. If exercised, this would lower the extension risk and help those tranches meet their maturity dates.
This risk could also be mitigated by improvement in labor market and expansion of debt consolidation programs. The recent rise in private student loan consolidations, if expanded to more mainstream borrowers, could increase prepayment speed for FFELP ABS transactions.
The decline in prepayment rates has followed the slow recovery in the job market for recent graduates. A Federal Reserve Bank of San Francisco study found that recent college graduate wages rose by 6% between 2007 and 2014, compared with a 15% increase for all full-time workers. The growth of student loan payment plans, including the Income-Based Repayment Plan, the Pay As You Earn Repayment Plan and the Income-Contingent Repayment Plan, among others, has also pushed down prepayment rates.
Additional information is available on www.fitchratings.com.
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