medium · Asset-Backed Securities
In a private student loan pool, how does 'Capitalization' of interest affect the pool balance?
- It increases the pool balance because unpaid interest is added to the principal when a borrower transitions from school to repayment.
- It decreases the pool balance as the government pays off the interest on behalf of the borrower.
- It remains neutral as interest is kept in a separate 'interest receivable' bucket that does not count toward the borrowing base.
- It results in an immediate SMM spike as the trust recognizes the gain from the higher principal balance.
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