Moody?s Says ED Bill Will Impact Student Loans

Investors that backed away from buying student lender Sallie Mae may be bolstered by a report today from Moody’s Investors Service.

Moody’s found that “recent legislation amending the U.S. Higher Education Act will affect future student loan securitizations in a number of ways, including shrinking their excess spread,” or the difference between the rate earned on the loans and the rate paid on the bonds and other expenses.

President Bush last week signed the College Cost Reduction and Access Act that Moody’s reports reduces the excess spread by lowering the special allowance payment rate (SAP) that lenders earn on loans first disbursed on or after October 1, 2007.

The bill also will increase the lender fee from 50 to 100 basis points and reduce the guarantee on defaulted student loans from 97% to 95% for loans made on or after October 1, 2012. It also distinguishes between for-profit and not-for-profit issuers, applying deeper cuts in the SAP rate to for-profit issuers.

Moody’s suggests that the bill may cause lenders to rethink their student loan business models and their securitization structures.

"The legislation is not likely to affect existing transactions, but we will be incorporating the changes into our analysis of future securitizations," said Moody’s Analyst Corey Henry, author of "The Impact of the College Cost Reduction and Access Act on Student Loan Securitizations."

A consortium that bid $25 billion for Sallie Mae in April called off the deal last week, saying the terms were no longer acceptable after passage of the education bill (“Sallie Mae Says Buyers Will Not Close Deal,” 9/27).

The consortium, led by equity investor JC Flowers and including Bank of America and JPMorgan Chase, indicated it may be willing to renegotiate the deal. Sallie Mae, officially known as SLM Corp, was publicly holding firm to the price.