Fed expands facility to aid student loan market

NEW YORK (Reuters) - The Federal Reserve’s decision to expand its term securities lending facility to include top-rated student loan asset-backed securities will spell relief for a segment in dire need of additional liquidity to help fund student loans.

The Fed on Friday said it broadened the eligible asset classes for its TSLF facility to include “AAA” asset-backed securities backed by the Federal Financial Education Loan Program and private student loans, allowing them to be pledged as collateral in order to borrow from the newly created TSLF, or a similar facility.

The American Securitization Forum applauded the Fed’s decision to expand the asset classes eligible for the TSLF facility to include triple-A rated student loan asset-backed securities.

“The Federal Reserve has taken a very positive step to provide additional liquidity to the student loan capital markets,” said Tom Deutsche, ASF deputy executive director.

In early April, the American Securitization Forum and the Securities Industry and Financial Markets Association jointly submitted a letter to the Federal Reserve Board and the Federal Reserve Bank of New York requesting that program-eligible collateral be expanded to include the student loan segment.

The request came after turmoil in the debt capital markets closed or severely limited economical access to the financing markets. For lenders with limited or no access to other sources of financing, funding costs made the extension of these loans costly and in turn led to constricted access to credit for students.

Students and their families have had two private sector financing options specifically designed to fund higher education expenses. They include government-guaranteed Federal Financial Education Loan Program loans and private student loans. The Fed will begin accepting the new collateral with its May 7 auction.

“The facility has helped liquidity for RMBS and CMBS markets, but the liquidity accorded is of even greater importance to student loan lenders who are facing tremendously higher capital costs than a year ago,” said Deutsch.

Spreads on “AAA”-rated student loan ABS, backed by FFELP Stafford and PLUS loans that are 97 percent government guaranteed, are trading dramatically wider.

This past week, Sallie Mae sold $4.0 billion of student loan ABS securities. The student loan provider’s “AAA”-rated three-year notes were priced at 110 basis points over three-month Libor, about 100 basis points wider than levels in the summer of 2007, market sources said.

“On the origination side, student loan lenders are not allowed to charge higher rates even though capital costs are significantly higher due to capital market disruptions,” Deutsche said.

Shares of SLM Corp SLM.N closed up 8.9 percent at $21.75 following the news of the expanded program.

“The Fed providing more liquidity is going to be a positive for lenders in general. However, there were comments made by Barney Frank about increasing the oversight of lending banks, which is having a bit of a negative on financial stocks today,” said Michael James, senior trader at regional investment bank Wedbush Morgan in Los Angeles.

Frank, a Massachusetts Democrat, is chairman of the House of Representatives Financial Services Committee.

About 32 lenders have either exited the FFELP program or suspended lending, including three of the top eight student loan holders, Brazos Group, the Pennsylvania Higher Education Assistance Agency and the College Loan Corp. The withdrawal of the lenders represents nearly $7 billion of overall 2007 originations.

Private student loan providers, like their government counterparts, rely heavily on the debt capital markets to fund loans to students and families but have been unable to access the securitization market since September 2007.

This year’s student loan FFELP ABS supply has been severely curtailed. Issuance in the first quarter totaled $8.2 billion, versus the $26.7 billion sold in the same year-ago period.

President Bush is expected to sign a student loan market stabilization plan into law, aimed at helping lenders such as Sallie Mae get through a rough patch in the capital markets. Lenders have warned of a potential loan shortage in coming months as millions of students seek financial aid for college.

Under the plan, the U.S. Education Department would temporarily be allowed to pump liquidity into the sluggish secondary market for federally guaranteed student loan debt.

Additional reporting by Kevin Drawbaugh, Caroline Valetkevitch; Editing by Leslie Adler