By Kevin Drawbaugh
WASHINGTON, Aug 27 (Reuters) - The multi-billion-dollar market for securitized student loan debt, a financial mainstay supporting U.S. higher education, is facing new stresses as Congress moves to reshape the troubled student loan industry.
With concern over the subprime mortgage crisis roiling the credit markets, a group of financial industry groups said on Monday that several new student loan financings have been put on hold, while loan financing costs are up.
The industry groups pleaded for moderation as lawmakers begin talks, expected to start next week, on finalizing and sending a package of reforms to President George W. Bush that follows months of scandals involving kickback schemes and conflicts of interest among lenders and college officials.
Propelled forward by outrage over the scandals, the reforms’ biggest impact is likely to come from proposed cuts in subsidies paid by the government to lenders of federally guaranteed student loans, such as Wall Street titans JPMorgan Chase (JPM.N), Bank of America (BAC.N) and Citigroup (C.N), as well as sector specialists like Sallie Mae SLM.N.
“The timing of the cuts contemplated could not possibly be worse in terms of program stability,” the industry groups, including the Consumer Bankers Association, said in a letter addressed to Massachusetts Democratic Sen. Edward Kennedy and other key lawmakers involved in the upcoming discussions.
“We recommend that every possible consideration be given to reducing the cuts so as to ameliorate negative consequences,” they said, stepping up a long-standing campaign to protect their businesses and profit margins from legislative threats.
In a rare case of agreement with the Democratic-controlled Congress, Bush favors cutting the subsidies, as well, with the talks ahead expected to focus on how deep to cut.
No matter the outcome, cuts would pinch the profits of the lenders and put the squeeze on lucrative deals that the largest of them make with Wall Street bankers to bundle and sell student loans as asset-backed securities (ABS).
Since 1998, more than $350 billion in student loan ABS has been issued, including a record-setting $79 billion last year.
Much more is in the pipeline, but analysts are concerned about investor demand given the changes sought by Congress and the White House, along with other challenges to the market.
Other hazards ahead include questions about student loan debt quality, a reassessment in some quarters of securitization itself, and the pending buyout of sector leader Sallie Mae.
“Choppy and uncharted waters” lie ahead for student loan ABS, said a July 17 report from credit rating firm Standard & Poor’s.
Higher education’s growing reliance on the ABS market to fund student loans is not addressed by the reforms coming out of Congress, which tinker around the edges of the existing system, but the reforms could have a big impact nonetheless.
If ABS returns falter, investors might channel capital to other sectors and away from the pool available for loans, potentially putting the squeeze on students, said Richard Lee Colvin, director of the Hechinger Institute on Education and the Media at Columbia University’s Teachers College.
Securitization of student loans has made credit available to borrowers who might otherwise have been denied it.
“Securitization has created opportunity and made it possible for students to go to college,” Colvin said.
But institutional investors in student loan ABS include pension funds, many in Europe, who seek to maximize returns and have little regard for whether they are supporting students.
“The big question to ask is whether we want the capital available to pay for college to be at the mercy of market forces on Wall Street and worldwide,” Colvin said.
“That’s really where we’re at now. As long as the global economy is good and strong and there’s tons of cash looking for investment opportunities, students will continue to have money available for loans. But I think the question for society is whether that’s what we want for college students,” he said.
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