Data presented in the student loan panel at this week’s ASF 2011 held in Orlando showed that enrollment rates remain steady and exhibit continues growth. Simultaneous with this, however, is the increase in education costs.
Gary Santo, a managing director at First Marblehead Corp., said that the industry had seen a migration toward state and community colleges because these schools used to be a cheaper alternative. However, traditional state colleges have also raised their tuition comparable to private institutions.
There is a need for the private sector to step in again, particularly at this point, Santo said, "as the market is healing." Private student loan originations have fallen off to only $8.5 billion last year from $23 billion in 2005, according to figures presented by Steven Moffitt, vice president at Goldman Sachs, at the panel.
Jonathan Clark, executive vice president at Sallie Mae, said that the primary impact of consolidation is the breaking up of student loan issuers into two categories: FFELP and private student loan originators. “It’s a much smaller universe,” he said. “It’s challenging for the smaller issuer/servicer. I can’t say whether they would survive.”
Despite the limitations, however, panelists still said there is still $100 billion of available student loan supply. However, Paul Vambutas, managing director at UBS, said that while there is this amount of supply “the investor base is chunky. There are very few investors and there is no follow on.” He said that his dealings with buyers are more “by appointment.”
Panelists agreed that there is a need for investor development. Expanding the investor base means restructurings that need to be done, said Jason Valentino, director in structured finance at MetLife, adding that there’s a distribution problem in student loan ABS that might be solved if these were made into term, fixed-rate securities.
Santo added that the industry has “to get started on disclosure.” One area that could be worked on is standardizing terminology. “so that when we talk about a deferment,” for instance, investors would know what that means for their analysis.
However, despite these, there is relative value in student loan ABS, according to panelists. On a relative spread basis, it is considered a good asset with one caveat. According to Vambutas, there is the operational risk for smaller players as they have not proved their long-term viability to investors
Borrower quality has also improved, Clark said that the sizes of the loans are getting smaller. They are also “treating this as a loan and are becoming more prudent about what they borrow.” Santo, meanwhile, sees long-term default improvement in these credits.