The President and CEO of the National Association of Student Financial Aid Administrators (NASFAA) Philip Day wrote Margaret Spellings, U.S. Department of Education (ED) secretary, and Henry Paulson, head of the Department of the Treasury, last week. In his letter, Day welcomed the recent government announcement that suggested a change in the focus of the Troubled Asset Relief Program (TARP) to assist FFELP student loan issuers.
However, he urged Spelling and Paulson to take similar "effective actions" to ensure credit financing is available for those private education loan borrowers that need funding to pay postsecondary education expenses.
"Surely private education loans must be considered 'troubled loan assets,' and action is needed to correct this marketplace dysfunction," Day wrote.
NASFAA's letter underscores the current problems in private student loan lending.
Gary Santo, co-head of capital markets at First Marblehead Corp., said that stories regarding shortfalls in the supply of financing for college students are becoming more frequent, and seem to indicate that schools may be looking at the need to carry overdue balances into the second semester.
Private student loans remain a vital source of credit for consumers, said Guido van der Ven of Education Investment Group LLC (EIG). Without this market, van der Ven said that there is anecdotal evidence that colleges have stepped in and provided lending of their own, although this might be limited to those colleges with large endowments. "Their contribution is not really large enough to make a significant dent in the funding that private student loans provide," he added.
"Thus far, the Department of Education has focused on shoring up the FFELP program with their conduit and put programs, with their ultimate backstop being the Direct Student Lending Program. To date, that has left the private student lending sector on the outside looking in, despite record demand for product," Santo said. "Secretary Paulson's statements regarding shifting TARP funds to support the consumer ABS market, including student loan securities, may present the first step toward addressing that sector, depending on how [the funds] are deployed."
Other sources said that the only private student loan lenders that are underwriting loans are those that have their own captive financing units, such as SLM Corp.'s Sallie Mae Bank, which is based in Utah, and First Mablehead's Union Federal Savings Bank, based in Rhode Island.
"The current private student loan market is a balance sheet business," a source said. "Non-balance sheet lenders are originating only to the extent that they could team up with a commercial bank that has the balance sheet to hold those loans."
Differentiation In Private
As of now, the field of private student lenders has thinned considerably, with few entities left standing. What will differentiate those that are left will be their respective abilities to retool and provide products that achieve the transparency and terms that the market and regulators are demanding.
"From a consumer credit standpoint, student loans have lagged behind other products, such as credit cards and auto loans, in terms of clarity of data, sophistication in underwriting, and debt collection practices," Santo said. "Firms such as First Marblehead, that possess the resources, expertise and most importantly, the data, will be best positioned to bridge that gap and deliver product once liquidity returns."
He said that First Marblehead is focusing on what it can control during this market lockup, developing products that are better suited to being financed under these difficult conditions.
"We have no plans to tap the market for the remainder of the year, as it just does not make financial sense," Santo said. "Instead, we view this time as an opportunity to accelerate our development of a different kind of product with a different delivery process. Our extensive dataset allows us to continue to identify attributes affecting loan performance beyond traditional industry standards, incorporating this information into our loan design and servicing strategies."
He added that a new breed of product will be needed, combining the best attributes of traditional, school-based programs and the more recently developed direct-to-consumer programs, which have steadily gained market share since 2001.
The problems in the private credit student loan arena are further complicated by a lack of collateral transparency, van der Ven said.
Issuers, he said, can help the market by providing increased transparency in terms of performance data, especially on private transactions.
"The information that's available pales in comparison with, say, mortgages. Until issuers decide to provide information on factors such as school type, graduation rates, FICO scores, and geographical location, the secondary market for these securities and loans will not function efficiently," van der Ven said.
Help for FFELP
The Ensuring Continued Access to Student Loans Act of 2008 (ECASLA), or H.R. 5715, that was passed in May 2008, will now be used to fund FFELP loans for the 2009-2010 school year.
This Department of Education replication of the 2008-2009 purchase and participation programs into a corresponding program for the 2009-2010 school year has been welcomed by market participants.
However, there is still a question as to whether the move is sufficient to solve the sector's liquidity problems.
"Clearly, extending it for another year is a band aid solution," said van der Ven last Wednesday. "Currently the market to fund FFELP student loans is not economical, given the legislated spread on those loans."
The Department of Education has also expanded the reach of ECASLA via the creation of ABCP conduits, which will be buying older Stafford/PLUS loans.
Just last Thursday, the Department of Education said it will extend the purchase program for certain FFELP loans originated in the 2007-2008 academic year. But this program will only remain until the conduits are operational on Feb. 28.
"Like everything else coming from the government to ease the credit crisis, there's a lot of moving parts to ECASLA," said DBRS Senior Vice President David Hartung.
Van der Ven additionally noted that the government-proposed conduit facility for Stafford/PLUS loans originated back in 2003 has not yet been set up. "Lender haircuts have not been established," he said. "The equity capital to fund these loans remains to be seen." He acknowledges, however, that the department's move is a positive in terms liquidity in the student loan sector.
Lenders that don't have the balance sheet have largely left the FFELP market already, leaving only those firms bearing bigger balance sheets, Van der Ven said.
What the Department of Education's ABCP platform does, in its most general sense, is serve as an outlet for loans originated between 2003 and 2007 that are already on the lenders' balance sheets, Hartung said. It also creates liquidity for the lenders. However, it does not cover consolidation loans that arguably comprise more than half of the loans on lenders' books.
Furthermore, it remains unclear how the proceeds of these sales into the ABCP conduits could be used. "Lenders are still paying on their auction rate securities, and one of their main objects or desires is to rid themselves of these costly, illiquid securities," Hartung said. "If they could get the older loans off their balance sheet or out of a trust by selling them, and use that money to somehow redeem auction rate securities, that also goes further to improving their liquidity position than just selling the old loans to originate new loans. That's one of the clarifications that need to be made - what, if any, are the restrictions on the use of these proceeds."
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