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 companies a good idea? Are companies yet again relying on government bailouts should something go terribly wrong?
How student loans have worked
Up until the recent student loan bill passed, student loans have been privately administered. 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 cash loan. A new student loan bill changed this practice, and the federal government will now administer loans.
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.” These loans are reorganized into products bought and sold by investors. Since the government backs the loans, they are considered more “safe”. $ 855 million worth of student loan securities will be sold by Citigroup. Bank of America is also going to be selling $ 1.23 billion of student loan backed bonds. Sallie Mae may also sell $ 1.7 billion in bonds.
A intelligent financial investment?
Because they are guaranteed loan securities that the government, within the end, backs up, these are considered very safe investments. These student loan bonds will not end up benefiting the taxpayers that take on the risk of the student loan securities. This situation has been partially resolved, but not entirely. The new student loan bill removes private companies from the middleman position. At the very same time, will the federal government continue to sell these securities? If the government agency does, at least the taxpayers will see the benefit.
