The historical performance and the rate of return on Student Loan Asset Backed Securities (SLABS) have been quite impressive due to the high proportion of government sponsored loans backing them. Asset Backed Security (ABS) collateralized by student loans is one of the four core asset classes financed through asset backed securitizations. Other types include home loans, auto loans and credit card receivables.
Players in the SLABS: Student Loan Asset Backed Securities
Securitization has emerged as a popular mode of funding student loans. Issuance of SLABS frees up lenders’ capital and allows them to make additional student loans. SLABS are issued by both government and private agencies.
Sallie Mae or SLM Corp is the largest lender and servicer of student loans in the US, besides other active participants. The company is the largest originator and holder of Federal Family Education Loan Programs (FFELP) in the US and also issues private loans to students for funding their higher education. Several state sponsored entities also issue FFELP loans, service them, guarantee them and issue SLABS. Some private industry players also provide private student loans exclusively and act as intermediaries between student loan originators and investors in SLABS by securitizing the loans. Loans issued under the US government’s FFELP program are guaranteed and insured against default by specified agencies.
While most SLABS are collateralized against FFELP loans, private loans or a mixture of both types can also be used to issue bonds. The SLABS are backed by student borrower’s future principal and interest payments and can be issued for varying periods of maturities. However, most SLABS have a maturity period of 20 to 40 years.
Changing Trends in SLABS: Student Loan Asset Backed Securities
The challenging credit market conditions in the US since 2007 and the waning of investor interest in ABS have forced entities, such as Michigan Higher Education Student Loan Authority, to suspend issuance of SLABS. Sallie Mae and other players have also witnessed a sharp decline in the bond issuance and student loan sanction activity since the financial crisis. In a bid to prop up the market for ABS, the federal government had introduced a Term Asset Backed Securities Loan Facility (TALF) in November 2008.