Spotlight on Student Loan ABS Issuers - Institute for Higher ...

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FFELP Loans
Forbearance
Grace Period
Guarantee Agencies
Higher Education Act
Legal Final Maturity
Date
Original Term
Originator
Owner Trust
Loans to students enrolled in eligible institutions, or to parents of dependent students, to
finance their educational costs provided by the Federal Family Education Loan Program,
known as FFELP. Payment of principal and interest on the student loans are guaranteed by
a state or not-for-profit guarantee agency. In addition to the guarantee payments, the
holder of student loans is entitled to receive interest subsidy payments and special
allowance payments from the Education Department on eligible student loans. FFELP loans
are grouped into four classes: Subsidized Stafford; Unsubsidized Stafford (which replaced
Supplemental Loans to Students in 1994); PLUS Loans; and consolidation loans.
A temporary postponement or reduction in the repayment of a loan to give the borrower
time and opportunity to make up for the overdue payments. Forbearance is granted if the
borrower is experiencing economic hardship and is generally offered in 12-month intervals
for up to three years. Interest continues to accrue during forbearance and the borrower is
responsible for paying it.
Specified period of time between the date a student graduates or drops below half-time status
and the date loan repayment begins. The grace period on FFELP loans is generally six months.
Under FFELP, guarantee agencies guarantee loans made by eligible lending institutions.
Student loans are guaranteed up to 100% of principal and accrued interest against death or
discharge. The agencies also guarantee lenders against default. For loans made before
October 1, 1993, lenders are insured for 100% of the principal and unpaid accrued interest.
Since October 1, 1993, lenders are insured for 98% of principal and accrued interest.
The enactment of the Higher Education Act of 1965 (HEA) was a defining moment in the
history of the education loan market. The purpose of the Higher Education Act was to
"strengthen the educational resources of our colleges and universities and to provide
assistance for students in postsecondary and higher education." The HEA represented a
federal commitment to alleviating the cost of higher education and equalizing college
opportunities for low- and middle-income students. The FFEL Program was created under
Title IV of the HEA.
The date after which a class of ABS notes is considered in default if all of the principal were
not repaid to note holders. The date is determined by the rating agencies based on
collateral characteristics and stress-test scenarios. Typically, the legal final maturity date is
set by amortizing the collateral with zero defaults and zero prepayments, and adding one to
six months to the date that each class pays off.
The length of the loan is set out in the underlying retail sales contract. Loan terms range
from 12 months to more than 72 months, with the typical term falling within the 60-month
range. The original term is equal to the remaining term plus seasoning.
The entity that lends money to obligors, or originates the loan contracts, for inclusion in an
ABS transaction.
An owner trust allows for creation of tranches with specific payment characteristics and
varying average lives. Time tranching is a useful method of enhancing the attractiveness of
a trust’s securities for a wider investor audience. Owner trusts typically feature money
market tranches, which are attractive to short-term investors. Another feature of owner
trusts is the use of excess spread as additional principal. Excess spread can be reallocated to
pay down the note balance in each period (full turbo) or until a specified level of
over-collateralization is achieved (partial turbo).
84 US Securitization Research Barclays Capital