Student Loan Securities Selling Faster Than Students Can Pay

by Chris Ivory

Despite increasing default rates on student loans, student loan securities continue to be a hot buy for investors.

Student loan debt has increased tremendously over the past years and is showing no signs of slowing down. In the first quarter of 1999, $90 billion in student loan debt was outstanding. As of the second quarter of 2011, that balance was $550 billion – a 511% increase over a decade. This should come as no surprise given that the cost of a four year college degree has increased over 1000% since 1980.

Investor demand is driving the sales of student loan securities. In the last week of February 2013, SLM Corporation, the largest U.S. student lender, sold $1.1 billion of securities backed by student loans. This year through February, other dealers have sold $5.6 billion of student-loan-backed securities, more than triple the figure for the same period in 2012, accord to Asset-Backed Alert.

Investors are seemingly attracted to the potential returns of these risky investments as interest rates for most securities linger near record lows. Portfolio manager at Thornburg Investment Management, Jeffrey Klingelhofer, says “[i]t’s a reach for yield.” Contrary to investors’ hopes, yields on securities backed by student loans, which move in the opposite direction of prices, have been plunging, according to Money & Investing.

This yield dip is due to borrowers’ increasing difficulty in repaying their student loans. A February 28 report by the Federal Reserve Bank of New York concluded 31% of people paying back student loans were at least 90 days late at the end of the fourth quarter. This is up from 24% in the fourth quarter of 2008 (both federal student loans and loans issued by private lenders were included in the report).

As former students continue to struggle repaying their loans, investors should be weary of the substantial risk of losing money in student loan securities.

Student-Loan Securities Stay Hot – Wall Street Journal