Student loan backed securities up for sale

Student Loans

Federally backed student loan securities are up for sale. Image from Flickr.

A few lenders that deal in federally backed student loans are planning a big sale. Securities made up of or combined with student loans are set to go on the market very soon. Is this sale of government-backed loan credit by private businesses a good idea? Or are businesses relying on taxpayers to bail them out should something go wrong?

How student loans have worked

Up until the recent student loan bill passed, student loans have been privately administered. The federal government backs the loans, but private businesses are responsible for lending, administering and collecting the loans. The theory was that these would provide the best personal loans to students. The most recent student loan bill changed this, cutting out the middleman and moving student loan administration to the government.

The student-loan backed securities

Much like the subprime mortgage securities that very nearly brought down the entire economy, student-loan backed securities are “bundled.” A group of loans is combined and re-split into “loan-backed securities” that are bought, sold, and traded by investors. Because these student loans are government-backed, they are considered “safer” investments. A company owned by Citigroup Inc. is going to be selling $855 million worth of these securities. Bank of America is also going to be selling $1.23 billion of student loan backed bonds. Sallie Mae will also sell $1.7 billion in bonds. This is in addition to the $8 billion of student loan backed securities already sold this year.

A smart financial investment?

The student-loan backed securities being sold as federally guaranteed loan securities will benefit the companies and investors. The federal government and taxpayers who take on the risk of these student loan bonds, however, will not be seeing much benefit. This is a situation, luckily, that has already been resolved — partially. The new student loan bill takes private businesses out of the mix. At the same time, will the federal government continue to sell these securities? At least if it does, the taxpayers will see the benefit this time.

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