Without a doubt, a puzzle looms over the student loan finance business. How will students continue to finance their educations amid the potential withdrawal of $20 billion from Federal Family Education Loan Program (FFELP) programs, reductions in subsidies to lenders that provide certain FFELP loans?
Assuming that lenders originate enough student loans to be securitized, how will investors in that sector regain enough confidence to provide more liquidity to the asset class and tighten spreads?
Gathering at the Waldorf-Astoria in New York last week, a roomful of securitization professionals put those issues on the table for discussion during the Student Loan ABS Conference convened by Fitch Ratings.
The industry continues to face several difficulties, such as finding replacement buyers lost by the withdrawal of the SIV market.
One student loan provider pointed out that traditional buyers are seeing tremendous opportunities for certain SLABS, which are seeing spread levels of Libor plus 100 basis points, compared to spreads of Libor flat before the credit market destabilized.
"No one knows how long this will last," he said. "On the FFELP side, we always hammer away at the point ... that this is government collateral. It has its explicit backing."
"There is too much fear in the market, and not enough greed," said one speaker. Still, the student loan ABS market could recover to the point where it produced as much as $40 billion in FFELP deals and between $5 billion and $10 billion in SLABS backed by private student loans.
"We will restore investor confidence," that speaker said.
On the securitization side, several market professionals said that combination of federal intervention and issuer transparency could play pivotal roles in the future of the asset class.
"There needs to be a watershed event to improve investor demand," Paul Vambutas, a managing director at Deutsche Bank Securities who oversees its student loan securitization business said during a discussion of how to reconcile the disconnect between credit performance and spreads.
"The federal government would provide a stimulus to the market if it purchased triple-A FFELP bonds, for which it guarantees underlying loans anyway, and then funded those purchases with T-bills," Vambutas said. That is one course of action that the industry, as a whole, could persuade the government to take.
The federal government should also consider reversing some of its most recent decisions that have affected funding for student loans, said other panelists.
At the end of the day, sustaining the student lending business will present a huge challenge to the entire industry. In addition to large, well-endowed Ivy League universities several small colleges, such as Brown University in Providence, R.I., and Davidson College, Charlotte, N.C., have used their endowments or other specific funds to eliminate the need for students to take student loans. But there is reason for caution, said one market professional.
Colleges like these are few and fortunate to have the financial ability to make college financially available to all who are admitted. Also, for the most part, students attending those colleges and universities minimized their debt loads by finding grants and other forms of financial aid. The extended use of endowments at a subset of colleges and universities will not change the need for private student loans in the broader market, especially for those middle class families who are already burdened with other debt.
"I think college endowments as a solution is overstated," said Roger "Rusty" Saylor, a managing director of securitized products for Citigroup Global Markets. He added that while extremely helpful for a small number of colleges and universities. "The need for us to continue to find a way to get students access to the college they want to go to is going to drive the [decision making] process of student loan funding for at least a decade, I see."
The industry will also have to think hard about how to sustain access to student loan funding in the face of industry and government pullbacks from the FFELP program, as well as costs of funding the total costs of education, which are increasing exponentially.
"We are headed for a train wreck here," he said. "We need to find ways to solve the current financing problems and develop new products that can help students fund the total cost of college education, regardless of where they attend."
As for the industry's part, some lenders are finding ways to improve transparency, in an effort to get investors more comfortable with private student loan ABS collateral. Specifically, First Marblehead and Brazos Higher Education Service Corp. have begun reporting deal data to Intex, a widely used industry data provider.
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