A few lenders that deal in federally backed student loans are preparing a big sale. These “securities” made of student loans are going to be sold soon. Is it a good idea to sell government-backed loan credit? Or are companies relying on taxpayers to bail them out should something go wrong?
How student loans have worked
Since the student loan program started, private companies have administered these loans. Private companies administer the loans, but the government backs them up should the students default on the loans. The original theory was that this private system would get students the best personal loans. The federal government will take over the administration of the loans, thanks to a student loan reform bill that was just lately passed.
Securities backed by student loans
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. $ 855 million worth of student loan securities can be sold by Citigroup. Bank of America is also going to be selling $ 1.23 billion of student loan backed bonds. A full $ 1.7 billion of bonds could be sold by Sallie Mae.
Are these securities a good investment?
Because they are federally guaranteed loan securities, these student-loan backed bonds will surely benefit those that buy into them. The federal government and taxpayers who take on the risk of these student loan bonds, nevertheless, will not be seeing much benefit. There is a resolution to this situation, but only kind of. The new student loan bill removes private companies from the middleman position. Some are wondering if the government will continue to sell these financial products? At least if it does, the taxpayers will see the benefit this time.
