3 Thoughts on Feasibility of Student Loan Backed Securities?
  1. Reply
    Mr. J
    February 16, 2014 at 6:20 am


  2. Reply
    Stuck on Cantaloupe Island
    February 16, 2014 at 7:06 am

    You should read about this topic on financial blogs, its been discussed a lot since the mortgage crisis, and is pretty interesting. In theory what you are proposing should be feasible as it is not much different from any other loan backed security; profit wise its harder to judge. You’d have to look into things like relative wages of graduates, loan terms, employment opportunities, etc.

  3. Reply
    February 16, 2014 at 7:19 am

    There are sort-of two questions here:

    1) Should there be student loan backed securities?
    There already are. Student loans are one of the four main asset classes of asset backed securities (along with credit card receivables, home equity loans, and car loans). Banks that originate student loans almost always sell them in this market for cash for new student loans. Since a large portion of student loans have government guarantees of 95-98%, these ABS have performed well even in the recent sub-prime debacle. Their liquidity has decreased substantially which has dropped lots of banks out of the student loan business which is obviously bad. Student loan ABS are called SLABS. There is lots of tranching done for SLABS to spread out prepayment risk just as there is for home mortgages. It is not as easy to refinance a student loan as a house and refinancing is not as interest rate sensitive so maybe that gives some insight into how the tranches work.

    2) Should these be CLO’s with tranched losses?
    That structure is soo 2005. I don’t think anybody trusts this structure anymore and CLO’s have dramatically declined in popularity. For the government guaranteed loans, equity tranches would be really small, i.e., if losses can only be 2-5% of the portfolio, do we really need this structure?. For private student loans where losses can be 100%, I just don’t see anybody buying into this because there aren’t models of student loan default correlation that would make sense to anybody now. Anyway, I’m sure that student loan CLO’s exist and I’m sure that you can buy them pretty cheap if you go looking. I think every debt-like asset class in the world has been tried in some CDO somewhere.

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