Whether large or small, banks have never had a lot of financial incentive to issue student loan ABS paper, but some market players say the shifting tides of the student loan business might change that.
Earlier this year, SunTrust Bank made its debut as a student loan ABS issuer, coming to market with a $765 million transaction in March, via Citigroup Global Markets. Although SunTrust joins KeyBank as a bank issuer of student loan-backed securitization deals, market observers note that KeyBank is the only one in that asset class that comes to market regularly. True enough, banks have little incentive to securitize their government-guaranteed student loan portfolios.
"One of the greatest barriers to further growth in federal student loan securitizations is their low regulatory cost of capital," according to a report from Standard & Poor's. The low capital cost, "makes student loans attractive to some banks, which opt to hold the loans on their balance sheet."
Still, enrollment and tuition costs are on the rise, and students are increasingly turning to private student loans, which are not government guaranteed, to make up the difference between higher education costs and government student loans. The securitization market is already beginning to feel the impact, as private loan securitizations have already boosted issuance growth this year, at least so far, according to a Fitch Ratings report titled The Student Loan Report Card. In the first half of 2006, transactions that were 100% secured by private loan collateral increased 72% over the same time period for 2005.
Market players say student loan market trends might nudge banks deeper into the securitization waters. On the primary market side, college students borrowed about $13.1 billion in private student loans during the 2004-2005 academic year. That worked out to be about the same dollar amount as Pell Grants, according to The College Board. For the 2005-2006 academic year, private education loans should amount to $19 billion out of the $222 billion in college funding, according to estimates from college information service provider Octameron Associates, the College Board and Sallie Mae. Private loans, which are not government guaranteed, carry a certain level of risk on lenders' portfolios. This might persuade lenders to consider using the securitization market more often as a way to move that risk off of their balance sheets, said Sanjay Sakhrani, an analyst at Calyon Securities, who follows such companies as Sallie Mae and the National Education Loan Network.
"If you think about the student loan industry, it is still growing at double-digit rates," said Sakhrani. "The securitization route for this asset class is probably more lucrative than the other asset classes. I would expect people to really rely on that. I think you're going to see an expanding market."
Sallie Mae began operating Sallie Mae Bank in January, slightly more than one year after it wound down its government-sponsored entity status in December 2004. Chartered as an industrial bank, Sallie Mae Bank began funding and originating private education loans and federally guaranteed consolidation loans made by its parent company, although the company did not disclose the amount of loans it has originated so far.
Whether the company securitizes those loans that it originates remains to be seen, according to some market players familiar with the company. Sallie Mae would take the same approach to it s securitization program - form its origination systems to ongoing servicing and collections - whether Sallie Mae Bank existed or not. If the loans originated through Sallie Mae are securitized, they would likely be backed by the same seller facing the trust, not the bank, and any loans sold to an ABS trust would be backed by the same sales teams and warranties, say some.
"So far we have not securitized any assets originated in the Sallie Mae Bank," said a Sallie Mae spokesperson. "The bank provides a more cost efficient means of originating loans, but we do not expect it to affect the volume of loans that we securitize."
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