Midwestern University, a not-for-profit graduate school specializing in health sciences, is getting back into the lending business.

A former lender under the Federal Family Education Loan Program, it has recently begun making private loans to students in partnership with two local authorities, the Glendale Industrial Development Authority and the Illinois Finance Authority.  These authorities are coming to market with a total of $30 million of bonds that will fund additional lending.    

The bonds have a lot in common with recent private student loan securitizations from marketplace lenders Social Finance and CommonBond: they are backed exclusively by loans to graduate and professional students, including many medical students, who have strong credit and a high probability of gainful employment.

The bonds are also highly rated. Social Finance has been talking up the fact that its latest deal, completed last week, earned a double-A rating from both Standard & Poor’s and DBRS.

Yet S&P expects to rate the senior bonds to that will fund lending by Midwestern even higher, at ‘AAA.’

The higher rating is notable because the Midwestern bonds are backed by loans to borrowers who are still in school and have not started making payments; SoFi and CommonBond primarily lend to young professionals who have completed their education and want to refinance existing student loans.

One of the reasons S&P is so comfortable with the risk in the Midwestern bonds is that the rating agency had access to the school’s track record of making federally guaranteed loans.  The university contracted MeasureOne, an independent firm, to analyze loan-level information from the National Student Loan Data System on students who attended Midwestern and entered repayment between 1995 and 2015.  

Based on this analysis, S&P expects approximately 3.0% of the pool to default, in its base case scenario; assuming that 25% of the principal of these defaulted loans is recovered, the transaction would have a net loss rate of approximately 2.2%.

By comparison, S&P expects 4.75% of the loans backing SoFi’s latest deal to default; in its presale report on that deal, it noted the lack of historical data.

Midwestern has 10 colleges on two campuses, in Downers Grove, Ill. and Glendale, Ariz., according to information posted in its website. Enrollment for the 2014/2015 academic year is 6,074. Approximately 10% of students at both campuses receive scholarship aid and approximately 90% have student loans.

The university is rated ‘A-‘ by S&P and ‘A+’ by Fitch Ratings.

Previously, the Midwestern University Foundation financed federally guaranteed loans under the federal government’s School as Lender model from 2002 until the FFELP program was discontinued in 2010.  It funded these FFELP loans by securitizing them or through the U.S. Department of Education, which provided participating schools with a line of credit and then purchased the resulting origination. 

When FFELP ended, the foundation sold its outstanding loans to a third-party or putting them to the DOE. It also redeemed its outstanding FFELP bonds. Since then, its only activities have been managing the money it generated by funding FFELP loans and making periodic contributions to the university for need-based scholarships, according to S&P’s presale reports and the deal prospectuses. 

Here’s how the new arrangement to finance private student loans works: the two local authorities will lend the proceeds of their bonds to the foundation, which will then lend to students. Initially the foundation will only lend to students enrolled in certain four-year programs and only to third- and fourth-year students in those programs. Borrowers (or their co-signers) must have a FICO score of at least 700 and cannot have revolving debt exceeding 70% of their available credit or $5,000.

Campus Door Holdings, a Delaware corporation, will provide origination services.

Educational Computer Systems, a Pennsylvania corporation and a wholly owned subsidiary of Heartland Payments Systems, will service the loans.

RBC Capital Markets is the underwriter of the revenue bonds.

Under FFELP, scores of schools lent to their students, though the practice attracted criticism for creating a conflict of interest. While the loans were often slightly cheaper than borrowing from banks (not least because schools waived origination fees), they also generated income for schools, whether they kept the loans on their balance sheets or sold them at a premium. Even if this income went back into financial aid programs, critics said, it created incentives for schools to encourage too much borrowing.  

Securitization has the potential to make private student loans even cheaper, particularly if schools can use data on their FFELP lending to demonstrate how safe these loans can be. With its double-A ratings, SoFi pays just Libor plus 110 basis points on the senior tranche of its latest deal.

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