medium · Asset-Backed Securities asset-nuances

In a private student loan pool, how does 'Capitalization' of interest affect the pool balance?

1. It increases the pool balance because unpaid interest is added to the principal when a borrower transitions from school to repayment.
2. It decreases the pool balance because the federal government directly pays off the accrued interest on the borrower's behalf.
3. It remains neutral because interest is kept in a separate 'interest receivable' bucket not counted toward the borrowing base calculation.
4. It results in an immediate spike in the reported SMM as the trust incorrectly recognizes a gain from the newly higher capitalized principal balance.

Sign up free to see the explanation and track your rank →