The student loan ABS sector, usually one of the most stable and reliable of the ABS asset classes, has been putting on some uncharacteristically dramatic behavior lately.
Last week alone, SLM Corp., known as the issuer Sallie Mae, reported first-quarter earnings results that suggested it was bracing for a "train wreck" in student loan borrowing.
Citigroup, through the Student Loan Corp., which it owns, decided to stop originating Federal consolidation loans, joining a list of about eight lenders who have made similar announcements.
Other industry officials say that list is longer than we know, because some lenders have stopped making those types of loans but have not announced it. Most interesting, to say the least, was the Senate banking committee's hearing on the impact of the credit crunch on the student loan market.
During the committee's hearing last week, the National Association of Student Financial Aid Administrators' (NASFAA) President and CEO Philip Day proposed a safety net comprising three major supports to keep the student loan funds flowing: federal intervention to provide liquidity in the financing markets; a Direct Loan program prepared to handle a sharp increase in volume; and a Lender of Last Resort program to eliminate administrative obstacles to students.
Many advocates of higher education affordability have offered similar ideas. From a capital markets perspective, the most interesting idea involves allowing the Federal Home Loan Banks or the Federal Financing Bank to invest in securities backed by triple-A FFELP student loans. Hopefully, that would drive home the point that issuers and dealers have been emphasizing for months now: Triple-A FFELP securities have the outright backing of the Federal government. It can hardly get more rewarding than to buy them at today's triple-digit spreads.
Also, it makes sense to pay lots of attention to the wounded FFELP patient, because federally guaranteed loans account for between 80% and 90% of the total student loan funding market, according to various estimates.
What a positive sign it is that the federal government has taken an earnest interest in the viability of the education financing market. It should do so, especially because its policies put an unwarranted burden on a market that was beginning to struggle under the weight of capital market disruptions.
Those policies refer to the College Cost Reduction Act and Access Act of 2007, which was passed in fall 2007. Fitch Ratings estimates that the legislation could result in more than $20 billion in funding being cut from FFELP.
By some estimates, liquidity needs to be restored to the student loan market posthaste, or else the nasty effects could be manifest by summertime.
"Most students have loans secured through this academic year," said Justin Draeger, a spokesman for the NASFAA. "If there would be major shortages, we would know by July or August."
At this point, the NASFAA has not received reports of students being unable to get a FFELP loan, and the financial aid dynamics are different for different schools across the country. Some would be able to make up the difference in funding, while others would not.
It would be a bad idea to take that chance, however. If a severe shortfall were to hit, those attending two-year colleges, career schools and community colleges would be the first affected. Who knows how long it would take for a sustained shortage in funding to reach traditional four-year and graduate schools?
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