Brazos Higher Education Service Corp. is looking to make an impact in the student-loan sector by breaking into new structures and innovations in the asset-backed market, said Murray Watson, president of the company.
Brazos is planning to come to market at the end of the second quarter with a $400 million transaction backed by a mixed pool of student loans. The deal, expected to be managed by Salomon Smith Barney, will mark the first time that the company securitizes alternative loans.
"About $150 million of the transaction will be alternative loans and the balance of it will be Federal Family Education Loan Program (FFELP) loans," Watson said.
The company first entered the ABS market with a $98 million transaction in the third quarter of 1994 as an alternative mode of financing - a decision Watson says has proven to be profitable to the company.
"In the past we had financed loans with long term lines of credit and those sources of long-term were kind of drying up so we chose to do a securitization," he added.
Since its ABS birth, the company has completed several securitizations, issuing two to four times in the market each year. To date, Brazos has securitized assets such as FFELP loans and consolidated loans under the U.S Department of Education Title IV, privately guaranteed student loans and private insured student loans, to name a few. Today, Brazos uses ABS as its primary source of funding, Watson said.
More Securitizations To Come
Watson says that the company will soon be offering a private-loan program to kindergarten through 12th grade families in private schools as a part of its alternative loan program. These loans will also be securitized.
Since its inception, Brazos has focused on service to students, parents and colleges and universities. Today the focus remains the same - to deliver the highest quality of service with the lowest cost of education financing possible.
Brazos is a group of unrelated, non-profit companies established for the purpose of providing financial access to higher education for students and their families.
Founded in 1975, the Texas-based company was comprised of one entity, Brazos Higher Education Authority, Inc. Today, Brazos is made up of 14 entities and has more than $3.4 billion in total assets with approximately $2.8 billion in student loans alone. Headquartered in Waco, the company employs 180 professionals with offices in Austin, Texas, San Juan Capistano, California, Miami, Florida and Arkansas.
A major force in the higher education secondary-loan market, Brazos has expanded its service beyond acquiring loans from originating lenders to one that services, originates, consolidates and offers loans directly to students. Through one or more of the Brazos companies, principally Educational Funding Services, Inc., Brazos now offers loans to students on the Federal student loan program, FFELP and various loan programs including the Brazos program called "Career Builder Loans."
And Watson doesn't think that Brazos will be exiting the student business anytime soon.
"We were organized to provide a source of financial assistance to students and that is what we will continue to offer - financial assistance to the young people that are going to college," he said. "As long as we do that we'll have a place, given the event that circumstances change or we can't do the financing anymore well then - who knows. But other than that I don't see anything that is going to make the need for financial aid go away."
Watson anticipates that the student-loan sector will be growing in the area of private loans, which are currently most needed in graduate schools, medical schools, law schools and expensive private undergraduate schools. The newest area that is in most need of alternative loans is private elementary, junior and high schools. He also speculated that the Internet will dominate the origination of student loans - something that Brazos has recognized by developing its own origination site.
A System that Works
As with any company that is active in the ABS business, Brazos tries to make careful decisions about which underwriters it works with, paying special attention to success ratios and its knowledge of the student-loan business.
"We have worked with a number of underwriters and we have found that certain people have a lot more knowledge than others and certain underwriting institutions have a lot more resources to offer than others," Watson explained. "Kind of like, you may be able to find the forest but you can't name the trees. A person may be very successful in one area of underwriting but not necessarily have the expertise in another."
Since its first issuance, the company has "limited it down to a certain group that they work with on each transaction."
"Out of that we know that if they say we have this or that kind of document, we don't go through all of this gamemanship we went through the first five to seven years that we've been in this business," he said.
Watson also noted that Paul Sheldon with Salomon Smith Barney has been involved in every financing transaction that the company has done.
"We've felt that Salomon Smith Barney has given us a lot of support that has been beneficial," Watson said.
Being a company that is smaller than other issuers in the student-loan sector, Brazos has had to put in extra effort, Watson explained, by offering more service to its lenders.
"We're not as big or have as deep of pockets as Sallie Mae," he said. "They have been in the business a lot longer than we have and have a lot more resources than we have.
"But, we try to put the human element between the student borrower and the servicer and the school."