Market updates and sector developments

The US Department of Education last week published a notice of proposed rulemaking (NPR) in the Federal Register regarding debt relief for certain federal student loans, including certain FFELP loans held by ABS trusts. Comments on the proposals are due by 17 May and the department aims to finalise the rules in time to start delivering relief this autumn.

The NPR includes nine rules that permit separate and distinct types of waivers using the Secretary of Education's longstanding authority under the Higher Education Act. Of these rules, eight are applicable to loans held by the department, while a ninth addresses ‘commercially held’ FFELP loans. The total estimated cost of these rules equals US$162.4bn, according to a BofA Global Research report.

BofA analysts anticipate that the eight rules applicable to loans held by the department will lead to higher consolidation activity and, consequently, a spike in prepayments in FFELP student loan securitisations. For these FFELP loans, the Secretary of Education would have the authority to waive repayment of the outstanding balance of a FFELP loan: when a loan first entered into repayment on or before 1 July 2000; when the borrower is otherwise eligible for, but has not successfully applied for, a closed school discharge; or when the borrower attended an institution that lost its title IV eligibility due to a high cohort default rate (CDR), if the borrower was included in the cohort whose debt was used to calculate the CDR or rates that were the basis for the institution's loss of eligibility.

Under the proposed rules, the secretary would notify the lender that a loan qualifies for a waiver and the lender would submit a claim to the guaranty agency. The guaranty agency would pay the claim, be reimbursed by the secretary and assign the loan to the secretary.

The department estimates that the net budget impact for the FFELP loan waiver will be US$17.1bn, which the BofA analysts believe mostly reflects the outstanding balance of FFELP loans to be forgiven. “We would not be surprised if the FFELP loan waiver is challenged in the courts or Congress under the Congressional Review Act,” they observe.

The department intends to publish a second draft rule focused on providing relief for borrowers experiencing hardship in the coming months.

Corinne Smith