S&P Global Ratings acknowledges a high degree of uncertainty about the rate of spread and peak of the coronavirus outbreak. Some government authorities estimate the pandemic will peak around midyear, and we are using this assumption in assessing the economic and credit implications. In our view, the measures adopted to contain COVID-19 have pushed the global economy into recession (see our macroeconomic and credit updates here: www.spglobal.com/ratings). As the situation evolves, we will update our assumptions and estimates accordingly.

We expect that the evolving macroeconomic environment caused by the COVID-19 pandemic and subsequent sudden stop in economic activity will present employment challenges for student loan borrowers resulting in higher levels of forbearance, delinquencies, and defaults. We believe that the impact of increased defaults on ABS ratings will depend on various factors, including loan type, obligor characteristics, unemployment length and severity, and specific transaction capital structures and credit enhancement.

Liquidity Effects

We have already observed increased forbearance levels across all student loan types as borrowers request, and servicers extend, temporary payment relief. We expect this trend to continue through at least September 2020. Spurred by the U.S. Department of Education's (ED's) six-month suspension of interest and principal on federally owned loans, many private and Federal Family Education Loan Program (FFELP) student loan servicers are offering similarly structured relief to borrowers. In response to this reduction in loan principal and interest payments, we have supplemented our existing liquidity cash flow analysis with additional liquidity analyses as appropriate. Based on these assessments, as well as typical student loan transaction features such as cash reserve accounts and the availability of loan interest and principal collections to pay note interest senior in transaction payment waterfalls, we believe that student loan transactions have sufficient liquidity to sustain increased levels of loan forbearance.

Credit Effects

To assess the potential longer-term credit impact of increased defaults on transactions and ABS ratings, we segmented student loan transactions into three groups based on collateral type: (1) FFELP loans; (2) in-school private loans; and (3) refinance private loans.

FFELP Student Loans

We do not believe that an increase in default levels as a result of COVID-19 effects would meaningfully impact FFELP student loan ABS ratings because FFELP loans remain federally-reinsured by the ED up to at least 97% of defaulted principal and interest as long as the loans are serviced in accordance with the ED's rule-based procedures. FFELP defaults trigger the government reinsurance, which acts as a prepayment of the loan balance. 'AA+' rated FFELP transactions stressed at 40%-60% default rates will only incur approximately 2.5%-3.5% net losses and still benefit from significant excess spread. Furthermore, only approximately 5%-6% of all rated FFELP ABS bond tranches are rated speculative-grade and the majority of those lower-rated tranches were downgraded due to legal final maturity concerns in connection with income-driven repayment (IDR) relief that pre-dated the COVID-19 pandemic. We do believe that increased forbearance levels that further reduce loan payments beyond the next few months have the potential to exacerbate existing legal final maturity rating concerns in transactions and cause liquidity-based rating downgrades.

In-School Private Student Loans

In-school PSLs include non-cosigned and cosigned (typically by parents) loans made while students are enrolled in school. While a student is in-school, these loans may defer both principal and interest, require an interest-only or a nominal monthly payment, or require full payment of principal and interest. Most state student loan authorities as well as Sallie Mae Bank and College Avenue focus on these loan types.

In 2013, our PSL criteria established benchmark base case default rates for certain deferred student loan types and identified other relevant factors, such as obligor credit score, co-signer presence, and school type, to determine default rates for other PSL types. Our PSL criteria was based on the weaker underwriting and poorer default performance of loans originated prior to, and through, the Great Recession. Since 2010, the in-school PSL industry as a whole materially improved its underwriting standards and, consequently, obligor loan performance improved considerably. Accordingly, we segmented in-school PSL transactions into two groups: legacy (pre-2008) and post-2010. Post-2010 transactions have higher credit quality pools and stronger capital structures than legacy transactions. Post-2010 performance shows that those transaction pools have experienced significantly lower defaults and losses than legacy transactions. The relative strength of the post-2010 transactions is also apparent in ABS ratings performance:

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• All in-school PSL transaction tranches rated speculative-grade are contained within legacy transactions; all post-2010 transaction tranches are rated investment-grade.
• Approximately 69% of all post-2010 transaction tranches are rated 'AAA'.
• Approximately 78% of all post-2010 transaction tranches are rated 'AA' or higher.
• Approximately 98% of all post-2010 transaction tranches are rated 'A' or higher.

Legacy PSL transaction tranches were downgraded because of either poor collateral performance or elevated note costs in connection with auction rate liabilities. Post-2010 transactions contain no auction rate liabilities, benefit from improved underwriting and lower default rates, and have not experienced any downgrades to date. The higher credit enhancement levels of the post-2010 transactions also reflect the strength of these transactions. For example, in the case of Sallie Mae Bank, the largest in-school loan ABS issuer, the credit enhancement coverage multiple of base case net losses at closing across 12 transactions rated by S&P Global Ratings since 2014 averaged 4.1x and 3.6x at the 'AAA' and 'A' rating levels, respectively.

Despite relatively strong net loss coverage multiples at each rating level, we expect to moderately increase our base case default rates for both legacy and post-2010 in-school PSL transaction pools to reflect the uncertain macroeconomic environment in-school student loan obligors will face. Legacy in-school PSL transaction tranche ratings--and in particular speculative-grade tranches--are most at risk of downgrades if performance worsens. Post-2010 in-school PSL transaction tranche ratings are better situated to absorb an increase in defaults.

Refinance Private Student Loans

Refinance (refi) PSLs are non-government loans where obligors consolidate multiple underlying student loans. Unlike some types of in-school loans, refi loan obligors are out of school and begin full principal and interest repayment at the time the loan is made. In recent years, lenders such as SoFi, Navient, and Laurel Road have securitized relatively uniform pools of refi loans made to post-graduate, high annual income ($150,000+) and high credit quality (FICO 760+), obligors. These pools have, to date, through a very benign economic environment, incurred cumulative net losses under 1.00%. Despite this performance, our base case default rate for refi loan pools ranges from 2.25%-4.00% of the initial pool balance reflecting the fact that we have yet to observe refi loan obligor performance through an adverse economic environment such as the one we are now entering.

Outstanding refi PSL transaction tranches are even higher-rated than post-2010 in-school PSL tranches.

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• All refi PSL transaction tranches are rated 'A' or higher.
• 97% of refi PSL transaction tranches are rated 'AA' or higher.
• 87% of refi PSL transaction tranches are rated 'AAA'.

The strength of refi PSL transactions is further reflected in their credit enhancement levels. The multiple of credit enhancement coverage of base case net losses at closing across approximately 40 refi loan transactions rated by S&P Global Ratings since 2014 averaged 7.6x, 5.9x, and 4.5x at the 'AAA', 'AA', and 'A' rating levels, respectively. Despite ample transaction loss coverage multiples at each rating level and obligor credit profiles that suggest refi borrowers will be more resilient to economic stress, we are cognizant that refi loan pools have yet to experience an adverse economic environment and we have already observed an increase in forbearance levels well above pre-COVID levels. Accordingly, we expect to moderately increase our base case default rates for refi loan pools to reflect the macroeconomic environment these obligors face.

State Student Loan Authority Private Student Loans

State student loan authority lenders have historically offered both in-school and refi PSLs. Recently, some of these lenders have expanded their refi loan volume and in some cases issued refi-only loan ABS transactions. These entities typically issue serial bond tranches out of master trust structures that permit future annual bond issuances. These master trusts provide issuers the flexibility to make credit- or liquidity-related capital structure adjustments to transactions over time (e.g. parity, release ratios, prefunding collateral eligibility) in conjunction with an annual issuance. We view this flexibility and these issuers' ability and willingness to manage their transactions as strengths for the rated bonds. Substantially all state student loan authority master trust bonds are rated investment-grade.

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We believe that these lenders' trust loan pools and transactions are subject to the same considerations as in-school PSLs. Subject to various volume levels, many state student loan authority lenders have multiple years of loan default performance data, and we utilize this information in determining base case default rates. Similar to in-school PSLs, we expect to moderately increase our base case default rates for state authority trusts to reflect the macroeconomic environment obligors are entering. We believe that the ratings impact on these master trusts' bonds will be partially mitigated by issuers' ability to adjust the credit profile, capital structure, and credit enhancement by way of annual issuance.

Summary

We generally expect to moderately increase our base case default rates and associated stressed level assumptions for private student loan pools to reflect the unprecedented macroeconomic environment obligors will experience. Default rate adjustments for pools in existing transactions will be specific to the transaction pool and incorporate the actual student loan pool performance. Speculative grade-rated legacy PSL tranches, which comprise 6% of S&P Global Ratings' PSL ABS universe, are at greater risk of downgrades. The remaining 94% of PSL tranches are at least investment grade-rated and we expect those ratings to be less impacted by an increase in defaults. We will continue to monitor the performance of student loan transactions relative to our ratings and the available credit enhancement and liquidity for those student loan ABS.