Tags: demand | student | loans | invest

Investor Demand for Student Loans Soars, Even as the Loans Go Bad

By Dan Weil   |   Thursday, 07 Mar 2013 08:06 AM

The deteriorating quality of student loans isn’t quelling investors’ voracious appetite for them.

The biggest student lender, SLM Corp., issued $1.1 billion of securities backed by private student loans last week.

Demand for the riskiest tranche — securities that will lose value first if the loans go bad — exceeded supply by a factor of 15, people knowledgeable about the deal told The Wall Street Journal.

Forbes Columnist:
‘Who the Hell Cleared This?’

SecondMarket Holdings, which has a system for trading shares of privately held companies, Monday unveiled a system for lenders to issue student-loan securities directly to investors.

These issuers will be able to access new pools of institutional capital, distribute reports to their bondholders as well as utilize SecondMarket’s secondary market expertise to purchase student-loan-backed securities.

“The catalyst for this new suite of services is investor demand,” SecondMarket CEO Barry Silbert told The Journal.

But one might wonder why there should be such demand. A total of 31 percent of people paying back student loans were at least 90 days in arrears as of Dec. 31, up from 24 percent four years earlier, according to the Federal Reserve Bank of New York.

With interest rates so low, investors are simply desperate for income. “It’s a reach for yield,” Jeffrey Klingelhofer, a portfolio manager at Thornburg Investment Management, tells The Journal.

The average yield for floating-rate student-loan-backed securities was 1.48 percent last week, compared with about 0.75 percent for comparable Treasurys, according to Barclays.

Jordan Weissmann, an associate editor at The Atlantic, says the student loan market’s problems aren’t exactly systemic. “Even if it were to go bust, the slice of the student loan market open to investors is still too small to do serious damage to the country's financial health,” he writes.

“Most of the loans are backed by the government, and most of the ones that aren't are fairly safe anyway.”

Forbes Columnist: ‘Who the Hell Cleared This?’

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