Fitch Comments on The College Student Relief Act of 2007.

NEW YORK -- The U.S. House of Representatives passed The College Student Relief Act of 2007 (H.R.5) by a vote of 356-71 on Jan. 17, 2007 and is to be debated next in the Senate. The bill is intended to make changes to the Federal Family Education Loan Program (FFELP) for both subsidized Stafford borrowers and FFELP loan holders by reducing borrower's interest rates for subsidized Stafford loans over the next five years from the current fixed rate of 6.8% to 3.4%. The first interest rate reduction will be effective July 1, 2007 and the final interest rate reduction will be effective from July 1, 2011 through January 1, 2012. After Jan. 1, 2012, the subsidized Stafford interest rate will revert back to 6.8%. To pay for the interest rate cuts, the bill sets forth reductions in payments to FFELP lenders and increases in certain lender fees.

If the legislation passes in its current form, Fitch does not expect to take any rating actions on existing asset-backed securities (ABS) transactions backed by FFELP student loans. The particulars of each reduction in lender payments or increase in fees and their respective affects on future student loan ABS transactions are detailed below:

For new loans made on or after July 1, 2007, the reimbursement guarantee provided by FFELP guarantors to lenders will be reduced from 97% to 95%. In terms of loan loss severities, Fitch ostensibly expects an increase due to the reduction in amounts paid by guaranty agencies to the lender; however, this increase is expected to be small in dollar terms. For example, assuming a 40% default rate on a $1 billion transaction with a one to one asset-to-liability (parity) ratio, the amount of principal loss resulting from a 2% reduction in guaranty reimbursement is $8 million. The reduction to 95% represents an increase in net principal losses to 200 basis points (bps) from 120 bps. Fitch believes excess spread levels on future transactions financing these loans will be sufficient to cover the increased loss amounts.

The U.S. Department of Education's Exceptional Performer Program (EP) will be eliminated on July 1, 2007. As a result, student loan servicers will no longer receive immediate reimbursement for borrower defaults at the higher 99% reimbursement rate. Since the EP designation is applicable in one year increments, there is no assurance that a servicer will receive this designation in the future. As a result, Fitch has never given credit to the additional reimbursement or the immediate timing of the reimbursement payment. The elimination of the EP program will not have an affect on future ABS transactions.

The Special Allowance Payment (SAP) rates for all FFELP loans paid the ED will be reduced by 10 bps for loans disbursed on and after July 1, 2007, with certain exemptions. For all Stafford loans, this would reduce the SAP rate from 90-Day Commercial Paper plus 1.74% or 2.34% to the 90-day CP rate plus 1.64% or 2.24% depending on whether the borrower is in school, grace, and deferment; or repayment, respectively. For consolidation and PLUS loans, the SAP rate will be reduced from the 90-day CP rate plus 2.64% to the 90-day CP rate plus 2.54%. This change will not affect holders of the lowest 10% of cumulative student loan volume.

Fitch expects the 10 bp decrease in SAP margin rates to affect credit enhancement levels for future transactions that finance increasingly higher percentages of loans originated on or after July 1, 2007. Excess spread would decline and, in particular, transactions utilizing a premium proceeds structure may take a longer period of time to reach an asset to liability or parity ratio of 100%.

The bill increases the 1.05% annual consolidation loan rebate to 1.30% only for banks whose holdings of consolidation loans are in excess of 90% or more of their total holdings. For those applicable student loan ABS transactions that finance 100% consolidation loans with a 50 bp servicing fee, the 1.05% rebate and servicing fee reduces the margin on the SAP index to 1.09% from 2.64%. For banks that are subject to the increased 1.30% rebate, this would further reduce the SAP margin to 0.84%. When the increased rebate is coupled with the reduced SAP margin of 2.54%, the SAP margin is reduced to 0.74%. For holders that are not subject to the increased rebate of 1.30%, the SAP margin would decrease to 0.99%. Transactions that finance consolidation loans that have an increased rebate would have lower amounts of excess spread of up to 35 bp.

The following two changes will not have a direct affect on the economics of existing or future student loan ABS transactions and therefore, no affect on outstanding ratings.

As of July 1, 2007, the Stafford, PLUS, and Consolidation Loan fees paid by lenders to the U.S. Department of Education will double from 0.5 percent to 1.0 percent.

Student loan guaranty agencies compensation for collection efforts on defaulted loans would be decreased from 23% to 20%, as of July 1, 2007. This rate would be further decreased to 16% over the succeeding four years.

Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.