The new stimulus package leaves the door open for potential student-debt forgiveness. Members of Congress would like President Biden to enact some level of forgiveness by executive order, but he has conveyed that he’d rather do it through congressional legislation.
While there’s very little credit risk in FFELP ABS, there’s tremendous uncertainty over the timing of repayments, which can be problematic.
Loan forgiveness would shorten potential bond life, while Covid-driven deferrals, forbearance, and so-called income-based repayment programs delay repayment, leading to extension risk that may delay bond repayments beyond their final maturity. That could mean that senior tranches don’t get paid on time, or at all. This aspect drove many rating-company student loan ABS downgrades last year.
Like other asset-backed sectors, spreads on FFELP student loan bonds gapped out at the beginning of the pandemic but recovered over the summer and have since compressed at a steady pace, particularly when investors realized it was a maturity risk issue, not a credit-risk one, Wheeler said.
He believes that FFELP student loan ABS have recession-resistant value. Investors can get a floating-rate spread guaranteed by the Education Department during a period where rates may be rising, he said. On the other hand, if we get through the Covid stimulus spending and there’s a recession, these bonds still have the government guarantee.
“If I wanted to find a product that has a government guarantee, is floating-rate, and has a spread of 50 basis points to 70 basis points, FFELP student loan ABS would be it,” Wheeler said.
This article was provided by Bloomberg News.