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Student-loan giants offer investors ABS choices

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Student loan servicing giants, Sallie Mae Bank and its offshoot Navient Solutions, are each approaching the market with deals securitizing students loans, providing investors with exposure to different types of loans and deal risks.

The $770.8 million Navient Student Loan Trust 2020-1 has a significant portion, 19.6%, of rehabilitated FFELP student loans which, have higher net-loss rates than the remaining non-rehabilitated FFELP loans, according to a presale report from Moody’s Investors Service. The Federal Family Education Loan program (FFELP) ended in 2010.

A logo hangs outside a Sallie Mae building in Reston, Va.

In addition, Moody’s says, the collateral backing the deal has a small percentage, 3.3%, of loans originated under the Health Education Assistance Loan Program (HEAL).

On the plus side, the FFELP loans acting as underlying collateral are indirectly guaranteed by the US Department of Education (DOE), which directly guarantees HEAL loans. The deal also benefits from excess spread that will be used exclusively to pay down bonds on or after Aug. 25, 2026, and a fully funded reserve account at closing.

“An additional credit strength is the expertise and experience of Navient Solutions,” one of the largest FFELP and private student services in the US, as the servicer and administrator, Moody’s says. It adds that performance of the FFELP student loans could weaken due to the unprecedented spike in unemployment during the pandemic, as borrower income limits may impede their ability to service their debt.

Salie Mae spun off Navient as a separate entity in 2014, with the former focusing on private loans and the latter a mixture of private and federal loans.

Moody’s notes that Sallie Mae’s much smaller servicing size and scale than Navient’s represents a credit challenge, but the rating agency nevertheless views it as a capable servicer because of its servicing expertise, franchise value, and regulatory oversight.

Unlike Navient’s deal in which 100% of the collateral is backed by the DOE, Sallie’s Mae’s $530 million SMB Private Education Loan Trust 2020-B deal securitizes private loans. Moody’s notes those loans are exclusively Smart Option loans that the lender originated after 2008 and made to both undergraduate and graduate students. Their borrowers have higher FICO scores and more co-signers and generally are of higher credit quality than earlier loans, Moody’s says.

The Sallie Mae deal has no loans indexed to the prime rate and so will have no basis risk between the prime and Libor rates. However, it does have a higher percentage of fixed-rate loans than previous deals, and so greater fixed-to-floating rate risk, Moody’s says.

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