As one the largest servicers of federally guaranteed student loans, Nelnet is a huge player in education finance. But its $25 billion portfolio of loans originated through a former public-private partnership is slowly sunsetting. So the company has been looking at ways to diversify.

One of the areas it has been dabbling in is private student loans, which borrowers use to fill the widening gap between what they can borrow from the government and the cost of attending college. Over the past several years, Nelnet has originated private student loans under various programs that have been discontinued. It has also acquired private student loans, directly from lenders and from third-party investors.

The servicer is now preparing to unload a large portion of its holdings through the securitization market. It’s selling $226 million of bonds backed by private student loans from a variety of sources, according to rating agency DBRS.    

The deal raises questions about Nelnet’s ambitions: Is the company testing the market for student loan bonds? Or is it taking advantage of favorable market conditions to liquidate a hodge-podge of holdings?

Just over half of the collateral, 54%, was originated by CommonBond and subsequently purchased by Nelnet; another 19% was originated by Nelnet under various programs that have been discontinued; 15% was originated by Graduate Leverage in 2007 and 2008 and sold to Nelnet by a third party investor in 2013; and 12% were by originated by Union Bank and Trust Co. of Lincoln, NE in 2015 and 2016 and subsequently sold to Nelnet.

DBRS has assigned a double-A rating to the senior tranches of notes to be issued. That’s the same rating it assigned to the senior tranches of CommondBond’s securitization, through SoFi has achieved a higher rating, triple-A on the senior tranches of recent deals.

The timing of Nelnet’s sale is undoubtedly good.

After a brief hiccup early this year following a scandal at Lending Club, investors have regained their comfort with marketplace lenders, particularly marketplace student lenders. It might have been difficult for Nelnet to securitize CommondBond loans in the second quarter, when it completed its $190 million of contracted purchases. But in recent months CommonBond itself, as well as SoFi Lending and Earnest, two other online student lenders, have all completed securitizations.

Also, the broader private student loan industry appears to have received huge boost from Donald Trump’s victory in last month’s election. The boost in sentiment is driven as much by relief as by any specific policy goals of the incoming administration. The fear was that, under a potential Clinton administration, federal student loan programs might be expanded, crowding out private lenders.

And coming to market with student loan bonds now likely means Nelnet can close the transaction just before risk retention rules that would requiring it to retain 5% of the economic risk of a securitization take effect Dec. 24.

A spokesman for Nelnet did not return calls seeking comment about the company’s plans in private student lending.

Michael Tarkan, an analyst at Compass Point Research & Trading, does not think the servicer is contemplating a big push into loan origination, however.

“If there was some sort of revamp of the FFELP program, they would be interested, but I don’t get the sense that they want to take on a lot more credit risk,” Tarkan said.

He said that the plan with the CommonBond purchase agreement was “to see how goes, and if a market is there, to try to securitize them,” which the company is now doing.

In its presale report on Nelnet’s deal, DBRS notes that the servicer’s program to originate loans with Union Bank and Trust Co., branded as “U-Fi,” has been “suspended.” The U-Fi website state that Nelnet has, or had, plans to “partner with leading banks and financial institutions to offer low-cost graduate and undergraduate private student loans, student loan refinancing options.” It does not name any lenders, however.

Even if Nelnet has abandoned plans to originate private student loans, it may well continue to acquire them opportunistically, as it does with federally guaranteed loans, and refinance purchases in the securitization market.

The company maintains a $275 million warehouse line of credit that is dedicated to acquiring private student loans, according to regulatory filings.  As of Sept. 30, there was $206.6 million outstanding on the facility and $68.4 million was available for future use.

Interestingly, Union Bank and Trust provides another source of liquidity. The bank is a trustee for various grantor trusts that purchase participation interests in student loans from Nelnet, according to regulatory filings. As of Sept. 30, $561.8 million of loans were subject to outstanding participation interests held by Union Bank, as trustee, under this agreement.. “This agreement provides beneficiaries of Union Bank’s grantor trusts with access to investments in interests in student loans, while providing liquidity to the company,” Nelnet states in its 2015 annual report.

Nelnet can “participate” loans to Union Bank to the extent of availability under the grantor trusts, up to $750 million or an amount in excess of $750 million if mutually agreed to by both parties.

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