Student Loan Financing: Risk Evaluation Tax-Exempt and Taxable Markets Converge
Diane R. Maurice Vice President Morgan Stanley-Investment Management
Ankur Goyal Associate Morgan Stanley-Risk Department
Student loan finance and the assessment of related risk evolved dramatically since the 1980s. One significant trend is the convergence between tax-exempt and taxable strategies to finance student loans. Historically, student loan financing relied to a greater extent on tax-exempt public financing sources. Today, tax-exempt issuers are just as likely to access taxable markets as they are tax-exempt funding sources as the demand for financing has grown over time and tax-exempt cap allocation has not increased to meet the need for all issuers. Often the same issuer will tap both markets in the same transaction. Whether, taxable or tax-exempt, the risk profile is essentially the same for Family Federal Education Loan Program (FFELP) backed student loan financings. Issuers consistently utilize the same securitization financing techniques, or repackaging of student loans, as a dominant financing vehicle.
To better frame the risk profile, this chapter begins by evaluating systemic shifts in the student loan industry. The ownership of long-standing issuers has changed hands. The sale of Sallie Mae, for example, as well as not-for-profit student loan entities represent one ongoing trend. Increasingly, the formation of strategic public/private partnerships and a reduced government ...