The American Interest
Analysis by Walter Russell Mead & Staff
Shocker: No One Wants to Buy Student Loan-backed Securities

studentloans

Worried by reports of rising defaults, investors turned up their noses at a new $225 million bond issue by Sallie Mae, the federal agency that packages individual student loans into large securities. The loan company canceled the offering after two weeks on the market. The WSJ reports:

…rising defaults could have crimped the cash flow of the federally backed loans supporting the new securities, because more defaults would mean less excess, or residual, income after holders of the original loans were paid.

What’s more, regulators and lawmakers have become concerned about growing levels of student debt, raising the risk political decisions could alter the bond market for student loans, said Jeffrey Klingelhofer, a portfolio manager at Thornburg Investment Management. For instance, a program that would allow borrowers to refinance their loans would reduce cash flow, Mr. Klingelhofer said.

Are student loans turning into junk bonds? With something like $1 trillion of student loan debt outstanding, investor skittishness is not good news.

[Ball and chain image courtesy of Shutterstock]

Published on April 27, 2013 10:15 am
  • andy

    Value maximization for capital is achieved by stacking layers of transaction diversity (work/value production). The dependence of income and investment activities of monolithic capital aggregators upon efficiency ratios, on the other hand, contravenes instrument value attainment by directly proportioning risk to investment with income payouts.

  • andy

    Work is a perk (investment excess…).
    Efficiency ratios are executive imposed justifications…

  • EmmaZahn

    FYI, Sallie Mae is no longer a federal agency. From Wikipedia:

    “The Student Loan Marketing Association was originally created in 1972 as a government-sponsored enterprise (GSE) and began privatizing its operations in 1997, a process it completed at the end of 2004 when Congress terminated its federal charter, ending its ties to the government.”

    I assume that means there is no longer a government guarantee on its loans which is why they are a harder sell to investors nowadays.

    • teapartydoc

      The persistence of government guarantees is what got us into hot water with the two F-M’s. What you say is quite fortuitous.

    • bannedforselfcensorship

      Fannie and Freddie were private, and also did not have EXPLICIT government backing. Gm, neither.

      I think part of the fear might be related to a potential debt jubilee for student loans.

      I can easily imagine a politician in 2016 eager to collect more votes offering this idea up, and maybe even implementing it.

  • Pete

    Don’t worry. The FED will end up buying this junk, too.

  • Anthony_A

    The link to the WSJ article is incorrect, and leads to your wordpress dashboard.