The Department of Education (DOE) on Oct. 10 made amendments to its Loan Purchase Commitment Program and its Loan Participation Program. Under these programs, the DOE could purchase eligible FFELP loans that were made for the 2008-2009 academic year, or those originated after May 1.
While the student loan industry applauds the efforts made by the government to inject liquidity into the sector, outstanding issues remain to be addressed. Panelists at Information Management Network's 14th Annual ABS East last week discussed these problems, specifically the overhang of loans - under both government and private lending programs - that still need to find funding.
"The Department of Education needs to figure out a way to deal with older vintage loans," said a panelist from a major student loan issuer.
An avenue suggested by panelists is to create a super conduit that will allow private banks to pull together liquidity to finance these loans.
Additionally, the exact reach and impact of current student loan legislation is still not very clear. Do these regulations include consolidated loans? How will the regulations treat or affect different entities that have varying amounts of PLUS and Stafford borrowers in their pools?
Panelists said that one of the problems with the government's purchasing of student loans is that valuations for each deal would differ, considering that each issuer program has different loan characteristics and composition. The trick, a panelist said, is "to have enough liquidity in the system to alleviate the lack of funding on the consolidated student loan side. This is so that private investment could be invited."
Participation of the private sector, however, has been elusive. Bridge financing, for instance, has been hard to get for not-for-profit student lenders, especially since banks are currently under the gun to reduce the size of their balance sheets.
In terms of other sources of government funding, panelists said that even though there are other competing uses for the Troubled Assets Relief Program (TARP), it is worth exploring the government's ability to buy troubled student loan assets via TARP. Questions for the government would include: Will the focus just be on buying triple-A securities? How can existing industry infrastructure be used - such as working with monolines or underwriters?
According to a rating agency analyst, the question is whether it's liquidity or credit that would define "troubled."
Private Student Loans
Like other consumer assets, private student loans are experiencing difficulty on all fronts. And, although the government has tried, it still can't provide the scope that private loans afford. The problem, according one panelist, is that although the government has done a lot through its PLUS program, it's still no match for what the private student loan sector can fund.
"One of the problems with private SLABS is that there is an incredible lack of transparency on how these assets will perform in a down economic cycle," a panelist said. For instance, the drop-out factor is a great unknown, according to panelists. The performance curve on these loans would be different in a deteriorating job market. "If you don't have access to credit, you don't have a way to smooth that curve out," one panelist said.
And why would investors take the time to understand student loan ABS "when they could buy five-year autos and revolving credit card debt," another participant said.
However, the more liquid FFELP market benefits from attractive spreads that it didn't use to have, as well as the government guaranty. An investor in the student loan panel said that two years ago she could never have invested in government-backed student loans as she is currently, since the yields were not there.
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