The recent trend of capital infusion to the student loan sector, though positive, presents risks, said panelists at American Securitization Forum's ASF 2004 conference last week.
After significant capital departure, student loans have received considerable liquidity flow with more IPOs than ever before. Nelnet Inc. was the first to do an IPO. There has also been an influx of private equity coming back to education lending.
Christopher Conroy, director at Standard & Poor's, said that this development has sparked greater access to education, more rated entities participating in the sector and more transparency of information on the performance of the pools, including default and delinquency data. In this arena, Sallie Mae set the standard.
Driven by an unabated refinancing trend, the influx of new money into the sector has given way to many new, untested companies jumping on the consolidation loan bandwagon. With the influx of untried companies in the sector, panelists were not certain how this type of collateral will perform over the life of a loan.
"Up until now we haven't been in a position where we had to rate this much consolidation loan collateral," said S&P's Conroy. The issue is more significant due to some recent pools that are backed entirely by consolidation loan collateral. Even though there potentially may be higher delinquencies with consolidation loans, Conroy said, "the federal guarantee and high quality of servicing protect ABS investors."
Also, with increased issuance in the sector - in 2003 S&P rated $50 billion of student loan ABS - another concern is deterioration in credit. Another broader concern is how can this new capital be put to good use.
Aside from the increase in consolidation loans, state agencies and municipalities, which issue bonds through indentures, have begun to rely more on the traditional ABS market. There are a number of indentures that are funded with auction rate securities. Some have become so large that the issuers have had to diversify their funding sources. ABS gives them an alternative income base.
"This is one trend that will accelerate," added Conroy, suggesting new players will enter the market.
Panelists also touched upon the continuing saga of reauthorization of The Higher Education Act. Sallie Mae Vice President Guido Van der Ven said that both the U.S. Senate and House of Representatives might act on this legislation by March this year, versus previous expectations that Congress would decide on this issue next year. Among other elements, this act provides for the elimination of the 3% origination fee (specifically for low-income borrowers), an increase in borrower limits and improving repayment options for borrowers.