Student loan ABS disclosure documents do not specify the universities that borrowers of the loans have attended, and that has created concerns over potential debt forgiveness.
The Department of Education announced on Tuesday that it would discharge the debts of borrowers who received federal loans to attend Corinthian College, a for-profit college that the government shut down and fined earlier this year for defrauding students by misleading them about job placement rates and the usefulness of the degrees they received at one of the college's many campuses.
That could be bad news for investors in securitizations of student loans guaranteed by the government under its Federal Family Education Loan Program (FFELP). Borrowers with debts wiped clean would not be making payments that could be passed through to investors in the FFELP loan trusts.
“For a high quality asset with strong performance, people are feeling very uncomfortable with student loans right now,” a fixed income head at a US hedge fund said. “The for-profit stuff gets bundled together with other transactions.”
But the extent to which investors should be concerned about their exposures is unclear. While prospectuses break down the proportion of a deal’s collateral pool that is tied to for-profit universities, there is no loan-level disclosure on the institutions that borrowers attend.
“I think that market is ripe for some sort of change,” added the investor.
Corinthian College could be the first in a line of litigation targets. Secretary of Education Arne Duncan said during a conference call on Monday that Corinthian College “may not be the last domino to fall” and added the Education Department would seek to develop a process to allow any student to receive debt forgiveness in cases of fraud.
The impact debt forgiveness has on FFELP student loans is expected to be small, however.
“We expect the direct impact on FFELP ABS to be de minimis given the limited amount of for-profit loans in FFELP pools and the termination of the FFELP program in 2010,” Deutsche Bank analysts wrote in a research note on Wednesday.
Deutsche estimates that for-profit universities make up about 5% of FFELP ABS collateral pools on average.