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Rating Action:

Moody's downgrades and places on review for downgrade five student loan deals by Education Loans Incorporated

06 Dec 2010

Approximately $999 million of asset-backed securities affected

New York, December 06, 2010 -- Moody's Investors Service has downgraded 18 notes and placed under review for possible downgrade seven notes from five student loan-backed transactions issued by Education Loans Incorporated. The ratings of the downgraded notes remain under review for further possible downgrade. The underlying collateral of the 1998-1 and 2005-1 transactions consists of government guaranteed (FFELP) loans. The collateral underlying the remaining three transactions includes both FFELP and private student loans. Student Loan Finance Corporation (SLFC) is the sponsor, administrator and servicer of the transactions.

RATINGS RATIONALE

The actions were prompted primarily by concerns related to the transactions' governance. The issuer directed the 2004-1 Trustee to use trust funds to redeem subordinate notes without meeting the required senior parity (the ratio of total assets to senior liabilities) and total parity (the ratio of total assets to total liabilities) thresholds after the redemption as stipulated in the Indenture. Due to the redemption, senior parity was reduced from 115.26% in October 2009 to 108.64% in January 2010, which was lower than the required 110%. Total parity after redemption was 98.70%, lower than the required level of 100%.

In addition, the issuer used trust funds to pay for legal costs associated with a lawsuit filed against the 1998-1 and 1999 transactions. While the governing documents provide for the payment of some transaction expenses, the total sum paid was in excess of the permitted amounts.

Although the 2004 C&D and 2005-1 trusts were not directly affected by the two incidents stated above, both transactions are exposed to the same governance risk that the other three trusts have experienced. Moody's has received Edlinc's plan to cure the covenant issues related to the 2004-1 trust. During the review period, Moody's will review and monitor the plan's implementation. In addition, we will continue monitoring transactions' performance.

Primary sources of uncertainty are transaction governance issues as well as credit deterioration on the transactions resulting from poor transaction governance.

PRINCIPAL METHODOLOGY

In monitoring securitizations backed by student loans Moody's evaluates operational and transaction governance risks introduced by non-performance of various transaction parties, in addition to assessing liquidity and credit risks. The adherence of the transaction parties to legal agreements governing securitization transactions is the essential element of assuring that noteholders receive the timely payments of interest and ultimate repayment of their principal investments. Moody's monitors compliance with covenants and other legal provisions of the transaction documents.

In addition, Moody's assesses both liquidity and credit risks of the student loan transactions. The factors affecting liquidity and credit performance of a transaction include defaults, guarantor reject rates, voluntary prepayments, basis risk, borrower benefit utilization, and the number of borrowers in non-repayment status, such as deferment and forbearance. As a part of our analysis, we examine historical FFELP static pool performance data. To the extent that performance data is available from a specific issuer, that information is used to arrive at our cash flow assumptions for that particular issuer. If an issuer's data are either limited or unavailable, our assumptions are based on FFELP performance data received from other participants.

In addition, historical interest rates and spreads are analyzed to evaluate the basis risk between the interest rate to which the notes are indexed and the interest rate to which the FFELP loans are indexed. This historical data is used to derive at expected, or most likely, outcome for each variable. These expected defaults, prepayments, interest rates, and other assumptions are then stressed in accordance with the rating categories requested by the issuer. Factors that influence the stress levels include the availability of relevant issuer-specific performance data, the seasoning of the loans, collateral concentrations (school types, loan programs), the financial strength and stability of the servicer, and the general economic environment.

These stressed assumptions are then incorporated into a cash flow model that takes into account the FFELP loan characteristics as well as structural (e.g., starting parity, cash flow waterfall, bond tranching, etc.) and pricing features of the transaction. The cash flow model outputs are analyzed to determine whether the transaction as structured by the issuer has sufficient credit protection to pay off the notes by their legal final maturity dates. In certain circumstances where cash flow runs are not available, we rely on model results from similar transactions. We also analyze the liquidity risk of the transaction given that borrowers can be in non-repayment status while in school, grace, deferment or forbearance status, and the transaction can experience delays in default reimbursement and other payments. Basis risk is the primary credit risk in FFELP student loan ABS. Moody's Aaa stressed basis risk assumption between LIBOR and the CP Rate is 25 basis points with certain periods in which the spread increases to 150 basis points. This is based on an analysis of historical spreads between the two indices. For additional information, please see "Methodology Update on Basis Risk in FFELP Student Loan-Backed Securitization," on moodys.com.

For the 1999, 2004-1 and 2004 C&D transactions, which include some private student loans, we also use another methodology: "Moody's Approach to Rating U.S. Private Student Loan-Backed Securities", published on January 6th, 2010. Other methodologies and factors that may have been considered in the process of rating this issue can also be found on Moody's website. In addition, Moody's publishes a weekly summary of structured finance credit, ratings and methodologies, available to all registered users of our website, at www.moodys.com/SFQuickCheck.

RATINGS

Issuer: Education Loans Incorporated, Student Loan Asset-Backed Callable Notes Series 1998-1

D, Downgraded to Baa3 and Placed Under Review for Possible Downgrade; previously on Feb 19, 1998 Assigned Aaa

H, Downgraded to Baa3 and Placed Under Review for Possible Downgrade; previously on Feb 19, 1998 Assigned Aaa

F-2, Downgraded to Baa3 and Placed Under Review for Possible Downgrade; previously on Feb 19, 1998 Assigned Aaa

K, B3 Placed Under Review for Possible Downgrade; previously on Dec 24, 2008 Downgraded to B3

Issuer: Education Loans Incorporated (1999 Indenture)

1999-1 Class 1A, Downgraded to Baa3 and Placed Under Review for Possible Downgrade; previously on Jun 4, 2009 Confirmed at Aaa

2001-1 Class 1A, Downgraded to Baa3 and Placed Under Review for Possible Downgrade; previously on Jun 4, 2009 Confirmed at Aaa

2001-1 Class 1B, Downgraded to Baa3 and Placed Under Review for Possible Downgrade; previously on Jun 4, 2009 Confirmed at Aaa

2002-1 Class 1A, Downgraded to Baa3 and Placed Under Review for Possible Downgrade; previously on Jun 4, 2009 Confirmed at Aaa

2002-1 Class 1B, Downgraded to Baa3 and Placed Under Review for Possible Downgrade; previously on Jun 4, 2009 Confirmed at Aaa

Senior Ser. 2003-1B, Downgraded to Baa3 and Placed Under Review for Possible Downgrade

Senior Ser. 2003-1C, Downgraded to Baa3 and Placed Under Review for Possible Downgrade

1999-1 Class 1C, Ca Placed Under Review for Possible Downgrade; previously on Jun 4, 2009 Downgraded to Ca

2001-1 Class 1C, Ca Placed Under Review for Possible Downgrade; previously on Jun 4, 2009 Downgraded to Ca

2002-1 Class 1C, Ca Placed Under Review for Possible Downgrade; previously on Jun 4, 2009 Downgraded to Ca

Sub. Ser. 2003-1D, Ca Placed Under Review for Possible Downgrade; previously on Jun 4, 2009 Downgraded to Ca

Issuer: Education Loans Incorporated (2004 Indenture)

2004-A1, Downgraded to Baa3 and Placed Under Review for Possible Downgrade; previously on Apr 8, 2004 Assigned Aaa

2004-A3, Downgraded to Baa3 and Placed Under Review for Possible Downgrade; previously on Apr 8, 2004 Assigned Aaa

2004-A4, Downgraded to Baa3 and Placed Under Review for Possible Downgrade; previously on Apr 8, 2004 Assigned Aaa

2004-B1, Caa1 Placed Under Review for Possible Downgrade; previously on Dec 5, 2008 Downgraded to Caa1

Issuer: Education Loans Incorporated (2004 C and D Indenture)

2004-C1, Downgraded to Baa3 and Placed Under Review for Possible Downgrade; previously on Aug 6, 2004 Assigned Aaa

2004-C2, Downgraded to Baa3 and Placed Under Review for Possible Downgrade; previously on Aug 6, 2004 Assigned Aaa

2004-C5, Downgraded to Baa3 and Placed Under Review for Possible Downgrade; previously on Aug 6, 2004 Assigned Aaa

2004-D, Caa1 Placed Under Review for Possible Downgrade; previously on Dec 5, 2008 Downgraded to Caa1

Issuer: Education Loan Incorporated (FFELP Loans - 2005 Indenture)

2005-1A3, Downgraded to Baa3 and Placed Under Review for Possible Downgrade; previously on Jun 23, 2005 Definitive Rating Assigned Aaa

2005-1B, Downgraded to B2 and Placed Under Review for Possible Downgrade; previously on Jul 2, 2009 Downgraded to Baa3

REGULATORY DISCLOSURES

Information sources used to prepare the credit rating are the following: parties involved in the ratings, and confidential and proprietary Moody's Investors Service information.

Moody's Investors Service considers the quality of information available on the issuer or obligation satisfactory for the purposes of maintaining a credit rating.

Moody's adopts all necessary measures so that the information it uses in assigning a credit rating is of sufficient quality and from sources Moody's considers to be reliable including, when appropriate, independent third-party sources. However, Moody's is not an auditor and cannot in every instance independently verify or validate information received in the rating process.

Please see ratings tab on the issuer/entity page on Moodys.com for the last rating action and the rating history.

The date on which some Credit Ratings were first released goes back to a time before Moody's Investors Service's Credit Ratings were fully digitized and accurate data may not be available. Consequently, Moody's Investors Service provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.

Please see the Credit Policy page on Moodys.com for the methodologies used in determining ratings, further information on the meaning of each rating category and the definition of default and recovery.

New York
Irina Faynzilberg
VP - Senior Credit Officer
Structured Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

New York
JingJing Dang
Asst Vice President - Analyst
Structured Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's Investors Service
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's downgrades and places on review for downgrade five student loan deals by Education Loans Incorporated
No Related Data.
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