Securitization, the repackaging assets into marketable financial instruments, is a key component of a global economy that values liquidity. This is true for the auto, mortgage and credit markets. However, the student loan market is a lesser-known space that has been affected by securitization. How safe is this market to invest in?
Student Loan Securitization
From 45 million borrowers, the United States has $1.3 trillion of outstanding student loan debt. SLABS, which are securities based on student hannah kepple assets (student loan asset-backed securities), is exactly what it sounds like. These loans are packaged in securities that investors can purchase, which deliver regular coupon payments much like an average bond.
SLABS’ main purpose is to diversify risk for lenders among many investors. Agencies can pool and package the loans into securities, and sell them to investors. This allows them to spread the default risk and allow them to issue more loans. By doing this, students can have more access to loans and investors have a diversifying investment tool. Lenders can also generate steady cash flow through their debt collection and securitization services.
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Metrics for Student Loan Borrowing
- The following tables show that student loan borrowers are increasing each year, as is the average loan balance.
- Total number of student loan borrowers
- Borrower’s average student loan balance
There are many fears that the student loans market will become the next financial crisis because of its similarities to the sub-prime market for mortgages.
There is evidence that many new college graduates are not able to find work that will pay off their student loans, even in a recovering economy. This has led to a rising default rate since 2003. Student loans, however, are not collateralized. Investors get nothing if the student defaults. In the event of a student defaulting on their loans, lenders lose even more than they would in the mortgage-backed securities markets.
Private loans
Sallie Mae, or SLM Corp. is the principal private lender for student loans. Sallie Mae offers loans that aren’t backed by government, and then packages these loans into securities. Securities are then sold to investors in segments or tranches. Sallie Mae has increased its lending restrictions since the recession and subsequent realizations that asset-backed securities were the primary catalysts for the crash. It still serves more than three millions borrowers.
Because federal subsidies have been eliminated, Wall Street banks have stopped securing loans. Student hannah kepple are less profitable due to the low interest rates. Federal Family Education Loan Program (FFELP), which was discontinued in 2010, was a government-sponsored program that subsidized and insured the loans. This basically guaranteed that the loans would be repaid. Lenders and investors were less enthusiastic about the Federal Family Education Loan Program’s expiration, as you can see.
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Peer-to-Peer (P2P) Lending
Peer-to-peer lenders such as CommonBond, LendingClub and SoFi have quickly replaced banks, removing many of the benefits mentioned above. Private lending is now at 7.% of the student loan market. These companies enable borrowers to get credit without having to go to a bank. Although this method is more difficult, takes more effort, and can be risky, it is an excellent option for people who are unable to get credit elsewhere. These lenders are willing to lend credit to people with low credit scores. However, this usually comes at a cost. Lenders may offer loans with very high interest rates that can be difficult to repay.
However, SoFi does consider income and credit when approving loans. People with better credit scores and histories are more likely to be approved. This means that the default interest rate will be lower. SoFi’s default rates as of 2020 were only 2.1%. This is quite impressive when you compare it to the most recent national statistics. A default rate of 11.5% for payments more than 90 days late, according to Standard & Poor’s credit data from the first quarter 2020.
By Type of Lender, Total Student Loans Outstanding
Public Loans
The key advantage of government-backed hannah kepple is the lower cost of borrowing than private lenders. This is because it is part of the federal government. Students will often take out as many public loans as they can before going to private lenders. Private loans have higher interest rates than public loans, so borrowers tend to repay private loans first. The major difference between private and federal loans is the fixed interest rates on federal loans. Private loans have variable rates depending on credit. Public loans such as Stafford loans do not start to accrue interest until six months after graduation.
The federal government does not check student loan borrowers’ credit reports, unlike private lenders. Many borrowers aren’t eligible for credit to qualify for loans, and they end up with indebtedness with no hope of repaying it. This is reminiscent of the sub-prime loans that created the housing bubble. Investors need to be cautious about how long these aggressive student loan lending strategies will last.
Attracting Investors
The seemingly endless growth potential for the education market attracts investors. Students flock to college to get an edge in the workforce after they graduate high school. After graduation, students who are unable to find work go back to school to earn more degrees. Millions of students borrow money to cover the high-priced and rising university fees. This pricing power has led universities to increase tuition and fees exponentially more than inflation. It’s no secret.
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