SLM Corp (SLM), Nelnet, Inc. (NNI), Discover Financial Services (DFS): College, the American Dream, and Wall Street

Page 1 of 2

In an effort to achieve the “American Dream,” college students are amassing student loan debt at an alarming rate. So, the student loan business is booming. And, the Fed’s Zero Interest Rate Policy (ZIRP) has brought life to the student loan asset backed securities (SLABS) market.

Federal loans

Since new legislation in 2010, the government has been lending directly to students. The government now oversees about 90% of all student debt, which is helping raise U.S. student loan volume to record levels. What’s more, unlike private loans, government loans aren’t securitized. That’s good, right? Not necessarily.

Federal loans don’t have credit standards and nearly any student can obtain a loan. Moreover, many federal loans have high caps. Take for instance the Stafford loan, which accounts for 75% of all government loans. An undergrad provided a Stafford loan can borrow up to about $58,000.

As if the bone-chilling thought of a 20-something year-old, with no credit to his name, borrowing $58,000 wasn’t scary enough, some students use the borrowed money to buy clothes, go on vacation, or even repay credit-card debt. However, what’s most daunting is that these loans are guaranteed by the government. Essentially, in the event of a mass default by students, tax payers could end up footing the bill.

Such a risk begs an obvious question: Why did the government change the rules so it could lend to students directly? The Congressional Budget Office estimates that for 2013, interest income from student loans was about $48.6 billion. For perspective, that’s roughly the combined 2012 net income of the four largest U.S. banks.

Private loans

The rest of the $1.1 trillion student loan debt is managed by private lenders.

Nelnet, Inc.The largest originator of federally-insured student loans is SLM Corp (NASDAQ:SLM) , otherwise known as Sallie Mae. In the fourth quarter of 2012, Sallie Mae sold $13.8 billion worth of SLABS, a 12.5% increase over the previous year. According to an article published by The Wall Street Journal, in the last week of April 2013, Sallie Mae sold $1.1 billion of securities backed by private student loans. Interestingly, demand for the riskiest tranche was 15 times higher than supply. Apparently, investors were willing to purchase higher risk loans in exchange for a higher yield.

Still, Sallie Mae isn’t the only company benefiting from increasing student loan debt. The less-known, Nelnet, Inc. (NYSE:NNI) is the second largest holder of Federal Family Education Loan Program (FFELP) loans. In 2005, Nelnet, Inc. (NYSE:NNI) had its most profitable single student loan asset backed securities offering, generating $862 billion.

Student Loan Corp., once a subsidiary of Citigroup, used to be the third largest buyer of FFELP loans until it was sold to Sallie Mae and Discover Financial Services (NYSE:DFS) in 2010 for $600 million. Discover Financial Services (NYSE:DFS)’s student-loan portfolio ended the fourth quarter of 2012 at $7.7 billion. That’s up almost 5.5% from a year earlier. Alleged strict credit checks and increased student loan underwriting is helping Discover’s stock rise to record highs. Discover Financial Services (NYSE:DFS)’s stock is up about 32% year-to-date.

What’s the big deal?

Student Loan ABS generated sales of $135 billion in 2006 and 2007. Compared to other assets, such as residential mortgage-backed securities, demand for SLABS was slow to pick up after the financial crisis. However, in 2012, student loan ABS generated $25 billion in sales as debt buyers scoured the marketplace for yield. Albeit small, the uptick is worth noting.

According to a Fed report, federal and private student loan borrowing totaled $966 billion at the end of the fourth quarter, up 11% from a year earlier, and up 51% since 2008. And, according to asset-backed security publication, Asset-Backed Alert, SLABS generated $5.6 billion in sales in January and February 2013. That’s a 30% rise year-over-year.

Page 1 of 2
blog comments powered by Disqus
Insider Monkey Headlines
Insider Monkey Small Cap Strategy
Insider Monkey Small Cap Strategy

Insider Monkey beat the market by 52 percentage points in 24 months. Our beta is only 1.2 (don't click this link if beating the market isn't important to you).

Lists

Rito Pls Buff: The 10 Least Played Champions in LoL Season 4

10 Covers of Popular Songs that are Better than the Originals

Must See TV: The 9 Most Anticipated Shows of 2015

The 15 Biggest Box Office Bombs of All Time

10 Things The World Can’t Stand About Americans

Picture Perfect: The 6 Smartphones with the Best Cameras

The 10 Best Countries To Work In the World

A Profitable Day At The Track: 5 Tips For Betting On Horses

Tearing You Apart: 6 Bad Habits That Ruin Relationships

Learning on the Job: The 6 Biggest Mistakes Parents Make

Shopaholics Rejoice: The 12 Biggest Malls in the World

Fright Night: 10 Horror Movies Based on True Stories

Mach Mania: The 10 Fastest Jets in the World

Military Heavyweights: The 10 Countries with the Most Tanks

All In: The 7 Richest Poker Players in the World

Abracadabra: The 10 Best Magicians in the World

The 10 Richest Asian Countries in the World in 2014

Eyes in the Sky: 10 Things You Need to Know About Drones

Rising Stars: The 6 Best Silicon Valley Startups

Military Muscle: The 5 Most Advanced Armies in South America

All that Glitters: The 7 Most Luxurious Jewelry Brands in the World

5 Things You Didn’t Know About ISIS but Should

Empowering Your Money: The 5 Best Energy Stocks to Invest In

The 11 Best Android Apps You Can’t Get on iOS

The 10 Most Important International Conflicts in 2014

Mood Enhancers: The 20 Most Uplifting Songs of all Time

Lover Beware: The 8 Countries that Cheat the Most

Breath of Fresh Air: The 25 Countries with the Best Air Quality on the Planet

Singles Beware: The 8 Worst Mistakes Made on First Dates

Healthy and Happy: The 10 Countries with Lowest Healthcare Costs

The 6 Best Company Team Building Activities to Build Workplace Camaraderie

Ships Ahoy: The 10 Busiest Shipping Ports in the World

10 Productivity Tips to Save You Time and Help You Do More With Less

Grab a Bite: The Most Popular Fast Food Restaurants in America

Friday Night Thirst: The 10 Most Popular Cocktails in the World

The 6 Greatest Unsolved Mysteries We May Never Figure Out

7 Useless Products You Never Should’ve Bought

The 5 Reasons Why You’re Single and Miserable

The 7 Most Addictive Foods in the World We Can’t Stop Eating (Even Though We Should)

5 Amazing Places You Can Swim with Dolphins

The Top 7 Most Livable Countries In The World

The 10 Most Expensive Baseball Cards Ever Pulled From A Pack

The 5 Easiest Second Languages to Learn for English Speakers

Silver Spoon: The 6 Richest Families in the World

The 20 Countries with the Largest Prison Populations in the World

The Top 10 Richest Actors in the World

The 10 Best Airline Stocks to Invest In Before They Fly Too High

Burger Kings: The 10 Most Expensive Burgers in the World

The 10 Most Ethnically Diverse Countries in the World

The 10 Most Exclusive Credit Cards in the World

Subscribe

Enter your email:

Delivered by FeedBurner

X

Thanks! An email with instructions is sent to !

Your email already exists in our database. Click here to go to your subscriptions

Insider Monkey returned 47.6% in its first year! Wondering How?

Download a complete edition of our newsletter for free!