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Student Loan Forgiveness to Affect FFELP ABS

Over the coming weeks and months, as the details of forgiveness are sorted out and an implementation plan develops, DBRS Morningstar believes that one of two administrative mechanisms will be adopted. Each would greatly affect Federal Family Education Loan Program (FFELP) asset-backed securities (ABS), which currently has more than $90 billion of bonds outstanding. If President Biden’s plan requires FFELP borrowers to consolidate into the Direct Loan program, FFELP ABS would likely experience an unprecedented wave of prepayments.

Loan cancelation across FFELP is another potential mechanism, rather than consolidating into a Direct Loan. DBRS Morningstar believes that a larger percentage of borrowers would benefit if forgiveness were administered by existing servicers. The path to loan forgiveness is simpler, with fewer steps that the borrower would have to navigate. Using this approach would mitigate any complication and ambiguity associated with consolidating into a Direct Loan, thereby increasing the likelihood of a successful outcome.