New Jersey Adds to Supply of Private Student Loan ABS

New Jersey is the latest private student lender to test the securitization market.

The state’s Higher Education Student Assistance Authority plans to issue $190 million of notes to fund the purchase of new loans over the next year and a half, according to a presale report published by Moody’s Investors Service.

The HESAA Student Loan Revenue Bonds, Series 2016-1 will issue 17 tranches of senior notes with final maturities ranging from December 2017 to December 2029, all of which are rated Aa2 by Moodys; there will also be a single, subordinate tranche maturing in December 2046 to be rated A2.

Bank of America Merrill Lynch is the initial purchaser.

The deal is hitting the market at the same time as a $188 million offering from Earnest, an online lender that has only been in business for about two years. The senior notes of that deal carry a lower rating, single-A, from DBRS.

The collateral for the two deals is very different. While both are backed by private student loans with no guaranty from the federal government, Earnest primarily lends to borrowers with advanced degrees and high incomes who want to refinance existing debt. In other words, good credit risks.

By comparison, the HESAA’s NJCLASS loans are primarily made to borrowers who are still in college.

There are a number of features that make the collateral for HESAA’s deal less risky than some other kinds of private student loans. All loans, except those used for consolidation, are originated through schools, which means the school's financial aid office confirms that the loan being requested will be used to finance the borrower's education at that institution. Moreover, HESAA requires that borrowers exhaust their grants, scholarships, institutional funds and federal subsidized loans before applying for an NJCLASS loan.

According to Moody’s this prevents over borrowing. In its presale report, the rating agency says that loans certified through the school channel “have historically performed better than loans disbursed directly to borrowers.”

Also, the HESAA has unique statutorily-authorized powers that allow it to use aggressive collection tools, resulting in higher recoveries on defaulted loans relative to other servicers. According to Moody’s these include administrative wage garnishment starting at 90 days of delinquency; offset of state property tax rebates, state income tax refunds and other state payments to individuals; ability to revoke licenses of professionals and lawyers who default and fail to enter into satisfactory repayment agreements with HESAA; and withholding of tuition aid grant awards of delinquent borrowers.

Also, as with most other private student lenders, HESAA primarily makes loans with co-borrowers. As of Feb. 29, the weighted average FICO score for loans in the trust estate was 741 and 89.6% of the loans had co-borrowers or cosigners.

Because the loans are pre-funded, noteholders are at risk of negative carry. As of Feb. 29, HESAA had $85.6 million of proceeds from prior bond issuances it had yet to put to work. At the closing of this deal, it will have another $184.7 million. However, the amount of negative carry is capped because at the end of each origination period, the trust must use the funds not being lent out to fund bond redemption. The 2016-1 series has three origination periods, the last of which ends on October 1, 2017. 

At least one other state agency, the New Hampshire Higher Education Loan Corp., has tapped the student loan market this year, as have three firms that make consolidation loans: CommonBond, Social Finance, and Darien Rowatay Bank.