The recent wave of student loan ABS backed by private (primarily graduate school) loans offers investors an attractive opportunities, due to the currently misunderstood nature of the sector, according to Citibank analyst Mary Kane. The yield pick up for private loan ABS is roughly double that of its Ffelp counterparts, despite the extreme difficulty of discharge and elevated earnings potential of those with graduate degrees.
While not federally guaranteed, private loans are viewed as being just as safe. All student loans, Ffelp and private, are treated similarly in bankruptcy proceedings, Kane notes. Additionally, without the federal backing, the credit standards to obtain private student loans are far more stringent. Also, roughly one-half of private loans have co-signors, "providing two households to borrow from."
Citi's Kane notes that while the spread pick-up for private student loan ABS is 6 basis points tighter at 29 basis points, but adds, " the pick-ups for three-and seven-year classes of private student loan remains in excess of two times the spread available for Ffelp-guaranteed student loan ABS. "We consider this valuation very attractive," Kane adds.