Reconsolidation federal student loan

NEW YORK -- Altering both the Federal Family Education Loan Program and Higher Education Act of 1965 may expose the U.S. student loan asset-backed securities sector to credit risk, according to Fitch Ratings.

President Bush's fiscal 2006 budget calls for proposed changes to the FFELP, which has served as the primary source of loan collateral for the student loan ABS universe, as well as the HEA. These revisions, if implemented retroactively, may adversely affect collateral performance and result in negative rating actions to one of the more historically consistent performers in the ABS sector overall, though Fitch thinks retroactive enactment is unlikely.

'While most of the proposed changes to FFELP and HEA would actually have little to no bearing on student loan ABS collateral, some, such as allowing for loan reconsolidation and offering extended repayment terms, would have a more dramatic effect,' said David Hartung, Senior Director, Fitch Ratings. 'The budget proposal is clearly focused on cost cutting, and the question of who will bear the burden of that is one that will be debated extensively over the next several months.'

While borrowers currently have limited opportunity to reconsolidate their loans, the new budget would allow for unlimited reconsolidation with a 1% loan origination fee per reconsolidation, a change that may adversely affect student loan ABS if the proposal is not limited to future new loan consolidation loans. Additionally, a proposal to prospectively reduce guaranty agency insurance and government reinsurance may increase Fitch's expected loss assumptions for student loan ABS going forward.

'Though many of the budget recommendations follow two years of congressional debate and reflects strong bipartisan opinion, other issues will still be hotly contested,' said Hartung. Fitch will continue to closely monitor the developments and provide the market with commentary.

'Pass/Fail: Impact of President's Fiscal 2006 Budget Proposal on Student Loan ABS Market' is available on the Fitch Ratings web site at www.fitchratings.com.