Fitch Ratings has upgraded the class A-7 and class B notes of Nelnet Student Loan Trust (Nelnet) 2006-2.

The Rating Outlook on the notes is Positive.

Additionally, Fitch has affirmed the ratings on the outstanding notes of Nelnet 2006-3. The Rating Outlook on the class A-6 notes remains Stable, while the Outlook on the class B notes has been revised to Positive from Stable.

RATING ACTIONS

Entity / Debt

Rating

Prior

Nelnet Student Loan Trust 2006-2

A-7 Remarketed U.S.-Denominated 640315AJ6

LT

AAsf

Upgrade

Asf

B 640315AH0

LT

Asf

Upgrade

BBBsf

Nelnet Student Loan Trust 2006-3

A-6 64031AAF3

LT

AAAsf

Affirmed

AAAsf

B 64031AAJ5

LT

AAsf

Affirmed

AAsf

Page

of 1

VIEW ADDITIONAL RATING DETAILS

Nelnet 2006-2: The notes pass all credit and maturity stresses in cashflow modeling with sufficient hard credit enhancement (CE). The upgrades of the class A-7 notes to 'AAsf' from 'Asf' and the class B notes to 'Asf' from 'BBBsf' are reflective of decreasing remaining term to maturity and subsequent decreasing maturity risk that can withstand Fitch's 'AAsf' and 'Asf' rating stresses, respectively. Although the model-implied rating is 'AAAsf' for all notes, the upgrades are tempered by elevated CDR levels which are at historical highs. In addition, for the class B notes, Fitch calculated parity of 101.6% is lower than the parity of 102.5% required for 'AAAsf' as described in the FFELP criteria. Fitch expects the CDR elevation to be temporary and has assigned Positive Outlooks, indicating the possibility of further upgrades over the next one-to-two years.

Nelnet 2006-3: The notes pass all credit and maturity stresses in cashflow modeling with sufficient hard CE. The affirmations of the notes reflect the stable collateral performance for the notes, in line with Fitch's expectations since the last review. The revision of the Outlook on the class B notes to Positive from Stable is reflective of the high total and increasing parity level of the notes, which is expected to continue and create positive rating pressure for the notes. The Outlook on the class A-6 notes remains Stable.

For Nelnet 2006-2, Fitch modeled customized servicing fees instead of Fitch's criteria-defined assumption of $3.25 per borrower, per month, due to higher contractual servicing fees for these transactions.

KEY RATING DRIVERS

U.S. Sovereign Risk: The trust collateral comprises 100% Federal Family Education Loan Program (FFELP) loans, with guaranties provided by eligible guarantors and reinsurance provided by the U.S. Department of Education (ED) for at least 97% of principal and accrued interest. The U.S. sovereign rating is currently 'AAA'/Outlook Stable.

Collateral Performance: For both transactions, after applying the default timing curve per criteria, the effective default rate is unchanged from the cumulative default rate. Fitch applies the standard default timing curve in its credit stress cash flow analysis. Additionally, consolidation from the Public Service Loan Forgiveness Program drove the short-term inflation of CPR, but levels have or are expected to fall to levels consistent with current sustainable constant prepayment rates (sCPR, voluntary and involuntary pre-payments). The claim reject rate is assumed to be 0.25% in the base case and 2.00% in the 'AAA' case.

Nelnet 2006-2: Based on transaction-specific performance to date, Fitch assumes a cumulative default rate of 17.50% under the base case scenario and a default rate of 52.50% under the 'AAA' credit stress scenario. Fitch is revising the sustainable constant default rate (sCDR) upwards to 3.00% from 2.50% and maintaining the sCPR of 9.00% in cash flow modelling. Defaults have returned to pre-pandemic levels with additional elevation due to delayed defaults from borrowers in forbearance during the pandemic. The TTM levels of deferment, forbearance, and income-based repayment (IBR; prior to adjustment) are 4.30% (4.48% at March 31, 2022), 5.14% (5.96%) and 21.54% (20.31%). These assumptions and are used as the starting point in cash flow modelling, and subsequent declines or increases are modelled as per criteria. The 31-60 days past due (DPD) and the 91-120 DPD have declined from one year ago and are currently 2.75% for 31 DPD and 1.00% for 91 DPD compared to 2.81% and 1.10% at March 31, 2022 for 31 DPD and 91 DPD, respectively. The borrower benefit is approximately 0.18%, based on information provided by the sponsor.

Nelnet 2006-3: Based on transaction-specific performance to date, Fitch assumes a cumulative default rate of 14.50% under the base case scenario and a default rate of 43.50% under the 'AAA' credit stress scenario. Fitch is maintaining the sCDR of 2.50% and the sCPR of 9.50% in cash flow modelling. Defaults have remained in line with expectations, but are temporarily elevated due to delayed defaults from borrowers in forbearance during the pandemic. The TTM levels of deferment, forbearance, and IBR are 4.42% (4.48% at Feb. 28, 2022), 5.19% (6.40%) and 22.20% (20.11%). These assumptions and are used as the starting point in cash flow modelling, and subsequent declines or increases are modelled as per criteria. The 31-60 DPD have increased and the 91-120 DPD have declined from one year ago and are currently 2.97% for 31 DPD and 0.88% for 91 DPD compared to 2.51% and 1.95% at Feb. 28, 2022 for 31 DPD and 91 DPD, respectively. The borrower benefit is approximately 0.17%, based on information provided by the sponsor.

Basis and Interest Rate Risk: Basis risk for these transactions arises from any rate and reset frequency mismatch between interest rate indices for SAP and the securities. As of the most recent distribution period, for Nelnet 2006-2 and 2006-3, 99.64%, and 99.47%, of the trust student loans are indexed to one-month LIBOR, respectively, (with remainder indexed to 91-day T-bills). All notes pay three-month LIBOR plus a spread. Fitch applies its standard basis and interest rate stresses to these transactions as per criteria.

Payment Structure: CE is provided by overcollateralization (OC), excess spread and, for the class A notes, subordination provided by the class B notes. As of the most recent distribution period, Fitch's total parity ratios (including the reserve account) are 101.60% (1.57% CE) and 102.54% (2.48% CE) for Nelnet 2006-2 and 2006-3, respectively. Fitch's senior parity ratios (including the reserve) are 106.97% (6.51% CE) and 107.90% (7.32% CE) for Nelnet 2006-2 and 2006-3, respectively. Liquidity support is provided by reserve accounts currently sized at their floors of $3,055,686 (Nelnet 2006-2) and $3,294,279 (Nelnet 2006-3). Nelnet 2006-2 is no longer releasing cash as the Trigger Event is in effect as of Jan. 25, 2023. Nelnet 2006-3 will continue to release cash as long as the target OC of $4,922,324 (not including the reserve fund) is maintained.

Operational Capabilities: Day-to-day servicing is provided by Nelnet, Inc. Fitch believes Nelnet to be an adequate servicer, due to its extensive track record as one of the largest servicers of FFELP loans.

RATING SENSITIVITIES

Factors that could, individually or collectively, lead to negative rating action/downgrade:

'AAAsf' rated tranches of most FFELP securitizations will likely move in tandem with the U.S. sovereign rating given the strong linkage to the U.S. sovereign, by nature of the reinsurance provided by the Department of Education. Aside from the U.S. sovereign rating, defaults, basis risk and loan extension risk account for the majority of the risk embedded in FFELP student loan transactions.

This section provides insight into the model-implied sensitivities the transaction faces when one assumption is modified, while holding others equal. Fitch conducts credit and maturity stress sensitivity analysis by increasing or decreasing key assumptions by 25% and 50% over the base case. The credit stress sensitivity is viewed by stressing both the base case default rate and the basis spread. The maturity stress sensitivity is viewed by stressing remaining term, IBR usage and prepayments. The results below should only be considered as one potential outcome, as the transaction is exposed to multiple dynamic risk factors. It should not be used as an indicator of possible future performance.

Nelnet Student Loan Trust 2006-2

Current Ratings: class A-7 'AAsf'; class B 'Asf'

Current Model-Implied Ratings: class A-7 'AAAsf' (Credit and Maturity Stress); class B 'AAAsf' (Credit and Maturity Stress)

Credit Stress Rating Sensitivity

Default increase 25%: class A 'AAsf'; class B 'Asf';

Default increase 50%: class A 'AAsf'; class B 'Asf';

Basis Spread increase 0.25%: class A 'AAsf'; class B 'Asf';

Basis Spread increase 0.5%: class A 'AAsf'; class B 'Asf'.

Maturity Stress Rating Sensitivity

CPR decrease 25%: class A 'AAsf'; class B 'Asf';

CPR decrease 50%: class A 'AAsf'; class B 'Asf';

IBR usage increase 25%: class A 'AAsf'; class B 'Asf';

IBR usage increase 50%: class A 'AAsf; class B 'Asf';

Remaining Term increase 25%: class A 'Asf'; class B 'Asf';

Remaining Term increase 50%: class A 'BBBsf'; class B 'BBBsf'.

Nelnet Student Loan Trust 2006-3

Current Ratings: class A-6 'AAAsf'; class B 'AAsf'

Current Model-Implied Ratings: class A-6 'AAAsf' (Credit and Maturity Stress); class B 'AAAsf' (Credit and Maturity Stress)

Credit Stress Rating Sensitivity

Default increase 25%: class A 'AAAsf'; class B 'AAsf';

Default increase 50%: class A 'AAAsf'; class B 'AAsf';

Basis Spread increase 0.25%: class A 'AAAsf'; class B 'AAsf';

Basis Spread increase 0.5%: class A 'AAAsf'; class B 'AAsf'.

Maturity Stress Rating Sensitivity

CPR decrease 25%: class A 'AAAsf'; class B 'AAsf';

CPR decrease 50%: class A 'AAAsf'; class B 'AAsf';

IBR usage increase 25%: class A 'AAAsf'; class B 'AAsf';

IBR usage increase 50%: class A 'AAAsf; class B 'AAsf';

Remaining Term increase 25%: class A 'AAAsf'; class B 'AAsf';

Remaining Term increase 50%: class A 'AAsf'; class B 'AAsf'.

Factors that could, individually or collectively, lead to positive rating action/upgrade:

Nelnet Student Loan Trust 2006-2

Credit Stress Sensitivity

Default decrease 25%: class A 'AAAsf'; class B 'AAAsf';

Basis Spread decrease 0.25%: class A 'AAAsf'; class B 'AAAsf'.

Maturity Stress Sensitivity

CPR increase 25%: class A 'AAAsf'; class B 'AAAsf';

IBR usage decrease 25%: class A 'AAAsf'; class B 'AAAsf';

Remaining Term decrease 25%: class A 'AAAsf'; class B 'AAAsf'.

Nelnet Student Loan Trust 2006-3

No upgrade credit or maturity stress sensitivity is provided for the class A-6 notes, as they are at their highest possible current and model-implied ratings.

Credit Stress Sensitivity

Default decrease 25%: class B 'AAAsf';

Basis Spread decrease 0.25%: class B 'AAAsf'.

Maturity Stress Sensitivity

CPR increase 25%: class B 'AAAsf';

IBR usage decrease 25%: class B 'AAAsf';

Remaining Term decrease 25%: class B 'AAAsf'.

Best/Worst Case Rating Scenario

International scale credit ratings of Structured Finance transactions have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of seven notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of seven notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAAsf' to 'Dsf'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.

CRITERIA VARIATION

The rating of 'Asf' for the class B notes of Nelnet 2006-2 is more than one category lower than the lowest model-implied rating 'AAAsf'. Per Fitch's 'U.S. Federal Family Education Loan Program Student Loan ABS Rating Criteria', if the final ratings are different from the model results by more than one rating category, it would constitute a criteria variation. Upgrades are limited due to the potential continued increase in CDR levels. Had Fitch not applied this variation, according to Fitch's FFELP criteria, the class B notes could have been rated 'AAsf'.

USE OF THIRD PARTY DUE DILIGENCE PURSUANT TO SEC RULE 17G -10

Form ABS Due Diligence-15E was not provided to, or reviewed by, Fitch in relation to this rating action.

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

ESG Considerations

Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg

Additional information is available on www.fitchratings.com

(C) 2023 Electronic News Publishing, source ENP Newswire