Much like the home equity sector, the student loan sector of the ABS market is booming on an unprecedented refinance wave that has boosted issuance to what will likely end up being record levels. To date, the term market has absorbed nearly $20 billion of student loan paper, but the first-half pace is not expected to continue.

With the nearly $20 billion sold to date, the market is on pace to break the volume record of $26 billion sold just last year. With its current pace of nine deals for nearly $17 billion, Sallie Mae could top that record by itself, although that is seen as unlikely. "It's been a fairly active pipeline so far, but activity is going to be much lighter in the second half," one banker said.

The market has blossomed, however, with new products emerging and an expansion into the European market. The acceptance of consolidation loan collateral has helped, as, unlike in mortgages, the refinancing wave has just begun. Interest rates for a federally subsidized Stafford loan reset July 1 to 3.43% for the next year, and prepayment speeds for even newer student loan ABS are in the 15% to 20% area.

In addition, with no seasoning effect, loans made years back are being consolidated shortly after entering repayment, data shows. The fastest paying of reported transactions issued by Sallie Mae, series 2002-3, is paying at 20.52% CPR as of April. Series 2002-2 is paying at 19.08% CPR.

Sallie Mae's latest transaction, by contrast, series 2003-7, was backed by 100% consolidation loans. "There is reduced prepayment risk as (the collateral) is consolidation loans that generally cannot be consolidated again," Fitch Ratings notes in a presale report for the issue.

"A lot of new issues are pricing at 7% CPR but paying back at over 15%," said Charles Ryan, a vice president in the education finance group at W.R. Hough. "A few years ago investors were concerned over high concentrations of consolidation loans. Now they realize that they are better off with consolidation loan collateral."

"If a loan isn't a consolidation loan, it's being refinanced," Ryan added.

The other new alternative student loan product to emerge this year has been the private graduate student loan product. Sallie Mae has priced a pair of private, student loan deals, totaling $2.4 billion, and Access Group priced a $453 million offering in May. Although technically more like unsecured consumer obligations, these are now viewed as offering good value for the often-rich sector.

In a recent report on Sallie Mae's private student loan program, Citigroup researcher Mary Kane notes that with roughly one-half of the loan base, the "significantly enhanced household income" of those with graduate degrees, which "elevates expected earnings on an accelerated trajectory."

"The value of a postsecondary education is heightened in a weakened economy," she pens. Citing a College Board study, Kane notes that households with graduate degrees earn, on average, 18% more than households with just a bachelor's degree ($78,000 versus $66,000) and, when looking at professional graduate degrees, the increased earnings differential jumps to 52% ($100,000 versus $62,000).

The spread differential for private loan product, which in Sallie's case is backed by Sallie Mae subsidiary HEMAR insurance policies, ranges from seven basis points for three-year senior paper to 22 basis points for seven-year seniors. Down in credit investors of single-A notes can pick up 39 basis points for 10-year subs.

Finally, the student loan sector has seen a migration back into the European market. With the longer-dated tranches offered by student lenders, European investors had traditionally been buyers of Sallie Mae paper in the mid-to-late 1990s, something that changed as spreads tightened dramatically in the new millennium. This year, Sallie has included three euro-denominated tranches in its offerings, for a total of €2billion ($2.27 billion equivalent) - each of which has been the longest-dated senior. The most recent tranche, a 6.9-year fixed-rate totaling €750 million ($850 million equivalent), priced at the tight end of price guidance and was over 1.5 times oversold.

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