Student Loan Forgiveness Program Could Ramp Up FFELP ABS Prepayments While Benefiting Private Student Loan ABS

On August 24, 2022, President Biden announced his long-awaited student loan forgiveness plan. Federal student loan borrowers are eligible for up to $10,000 in relief if their adjusted gross income is less than $125,000 a year, or less than $250,000 for married couples filing a joint tax return. The loan forgiveness program applies only to government-held student loans, the vast majority of which were made under the federal direct student loan program (Direct Loan), and has no applicability to private student loans.

Federal Family Education Loan Program (FFELP) asset-backed securities (ABS) transactions with fast-approaching legal final maturity dates would benefit the most from loan forgiveness because such forgiveness would result in large prepayments to securitization trusts. Jon Riber, Senior Vice President of U.S. ABS and lead student loan analyst at DBRS Morningstar, estimates that 50% or more of existing FFELP student loan ABS pools will prepay. In addition, we view federal student loan cancellation as a credit positive for private student loan ABS performance because borrowers who hold both private and federal student loans and qualify for federal student loan forgiveness will be able to better afford their private student loans in an improved cash flow position.