OREANDA-NEWS. The U.S. Department of Education's latest student debt repayment plan could raise prepayment rates for The Federal Family Education Loan Program (FFELP) asset-backed securities (ABS), Fitch Ratings says. The Revised Pay As You Earn (REPAYE) plan is available to Direct Loan program (DL) borrowers who received loans prior to 2010. FFELP borrowers can become eligible for the new program by consolidating their existing FFELP loans into DLs.

The REPAYE program follows a similar pay-as-you-earn program in place since 2012 that was eligible for borrowers that received loans beginning in 2011.

REPAYE is forecast to extend benefits of income-based repayment to 5 million more borrowers. It will allow borrowers to cap monthly student loan payments at 10% of their monthly discretionary income and forgive all remaining principle and interest after 20 or 25 years. It will also provide a new interest subsidy designed to soften ballooning payments that will occur if the borrower's income-driven payments do not match the accruing interest. REPAYE will become available in December.

We expect the terms of this program may entice borrowers to prepay their FFELP loans and consolidate into DLs. However, it remains unclear how many FFELP borrowers will opt into it. We believe any rise in FFELP prepayment rates would be a positive factor in mitigating the maturity risk in some of the FFELP ABS transactions.

According to Navient, in the fourth quarter of fiscal 2015 (ending September 30) the average prepayment speed for consolidated FFELP ABS trusts rose by 0.5% to 5.4%. The average prepayment speeds for non-consolidated trusts declined to 7.2% from 11.1% due to decline in optional loan repurchases. Navient's portfolio represents nearly one-half of outstanding FFELP student loan ABS trusts.

Income-based repayment plans are meant to relieve the pressure on student loan borrowers. These plans, along with some improvement in the job market, are likely working. Last month, the U.S. Department of Education announced that the cohort default rate for federal student loans fell for the second year in a row to 11.8%. It had been 13.7% last year.