Fitch: Deferrment & Forbearance Rates Hit Historical Highs for U.S. FFELP ABS

Mon Jun 1, 2009 1:14pm EDT

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NEW YORK--(Business Wire)--
U.S. FFELP student loan borrowers are coping with rising unemployment and a
stagnant job market by deferring and forbearing on their loans at accelerated
rates with no near-term relief in sight, according to Fitch Ratings. 

The rate of deferment and forbearance continued to accelerate last quarter, with
deferment increasing 187 basis points (bps) to a historical high of 16.44%.
'Rising deferments and forbearances indicate that a growing number of borrowers
may be returning to school to ride out the recession,' said Senior Director
Cynthia Ullrich. 

Forbearance climbed 118bps to 11.77%, the highest quarterly increase in over
three years. Deferment is an entitlement; however, with the exception of a few
types, forbearance is granted at a lender's discretion. 'The upward trend in
forbearance seems to imply that lenders and borrowers are working together to
prevent default during this tough economic time,' said Ullrich. Deferment and
forbearance enable student loan borrowers to temporarily postpone, and, in the
case of forbearance, decrease loan payments for some period of time. 

Although certain economic indicators have hinted at the start of an economic
upturn, Fitch does not expect pressure to ease on deferment and forbearance
levels anytime soon. 

Borrowers can stay in deferment for as long as three years; but, since the
Department of Education pays accrued interest during the period on subsidized
Stafford and, depending on the origination date, on the entire or a portion of a
consolidation loan,, elevated deferment levels should not have a material impact
on FFELP ABS trust performance. However, 'increasing forbearance levels can have
a more damaging effect on excess spread of FFELP ABS trusts,' said Ullrich.
Unlike deferment, the borrower is solely responsible for all accrued interest
for all loan types. Borrowers experiencing financial difficulties often choose
not to make any interest payments during the forbearance period but instead opt
to have it capitalized. As a result, the trust forgoes interest on these loans
for at least a year as lenders may grant a single forbearance for up to 12
months at a time. 

Fitch expects undercollateralized trusts to be impacted the most by higher
forbearance. This could eventually lead to Negative Rating Outlooks and possibly
rating downgrades on subordinate tranches of FFELP ABS. 

Fitch's rating definitions and the terms of use of such ratings are available on
the agency's public site, 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. 

Fitch Ratings, New York
Nicole Edwards, 212-908-9114
Cynthia Ullrich, 212-908-0609
Media Relations:
Sandro Scenga, 212-908-0278

Copyright Business Wire 2009

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