Canceled Student Loans May Be Boon for Bonds
- FFELP ABS offer relative value even if debts forgiven: Cantor
- Repayment timing uncertainty doesn’t affect spread pickup
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The U.S. student loan forgiveness that progressives in Congress are calling for may not be a bad thing for investors in bonds backed by that debt, because owners of those securities are getting paid high enough yields to compensate for any early principal payments that may result.
The securities backed by loans originated under a now-defunct program called the Federal Family Education Loan Program, or FFELP, will likely sport higher returns than other floating-rate debt even if loan forgiveness leads to a spike in dreaded prepayments. The sector would become awash with liquidity as the federally-guaranteed loans are paid and the most distressed borrowers avoid default, market participants said.