How will student debt cancellation effect the SLAB bubble?

[Emily]

Bailout or disruptor?

https://www.dailymail.co.uk/news/ar...debt-Janet-Yellen-Jill-Kamala-pushed-him.html

Published: 01:11 EDT, 27 August 2022 | Updated: 01:44 EDT, 27 August 2022
By Harriet Alexander For Dailymail.com

• Joe Biden on Wednesday announced that $10,000 in student loans would be cancelled for those earning under $125,000
• On Friday it emerged that the Treasury Secretary, Janet Yellen, and his wife Jill urged Biden not to go ahead with the policy
• It was supported by Kamala Harris, Chuck Schumer, Elizabeth Warren and Raphael Warnock, according to The New York Times
• Biden's advisors were split: Chief of Staff Ron Klain said it would appeal to younger voters, but political advisor Mike Donilon said Americans were unsure
• It also emerged that the rollout was rushed, with the loan service companies not warned and White House economists unclear of the precise cost

https://www.natlawreview.com/article/rmbs-to-slabs-history-repeating-itself

From RMBS to SLABS: Is History Repeating Itself?
Wednesday, April 3, 2019
...

Though most student loans are federally-guaranteed, about $118.7 billion are non-guaranteed private loans. Some analysts have been bullish on SLABS, viewing private lender asset-backed securities as a good investment because private loans are generally perceived to be of higher quality (at least as compared to government-backed student loans, which focus not only on creditworthiness, but also on need). Private student loans can be packaged together to form derivatives called SLABS, which (in theory) allow investors to receive regular coupon payments on the underlying loans. These SLABS bear significant similarities to the Collateralized Debt Obligation (CDO) derivatives that were a substantial factor in the 2008 financial crisis. But SLABS may be even more dangerous, particularly when one considers that there is no house to serve as collateral...
© 2022 Bilzin Sumberg Baena Price & Axelrod LLPNational Law Review, Volume IX, Number 93

https://www.investopedia.com/articl...n-assetbacked-securities-safe-or-subprime.asp

Student Loan Asset-Backed Securities: Safe or Subprime?

By Jack Du

Updated August 31, 2021
Reviewed by Charlene Rhinehart

With a global economy in which liquidity is increasingly important, securitization—the repackaging of assets into marketable financial instruments—has slithered into every market. While this affects the mortgage, credit, and auto loan markets, a less widely known space that has been transformed by securitization is the student loan market. But just how safe is this market for investors?

• Student loans make up more than $1.7 trillion in outstanding debt in the United States from more than 45 million borrowers.
• Student loans are being securitized as asset-backed securities known as SLABS.
• SLABS have been enticing to investors due to some structural guarantees, but as student debt loads increase, they may become riskier than originally thought....

 

[Emily]

Too big to fail banks are in on this, from 2015:

https://www.businessinsider.com/ban...-business-2015-6?international=true&r=US&IR=T
The only bank that stuck it out in a crucial part of the student loan game
Jonathan Marino
Jun 11, 2015, 12:06 PM
...

SLABS are student loan asset backed securities. In short, it's when a student refinances a loan and a large group of those refinanced loans are packaged together and sold to investors.

The only big bank in that part of the new student loan market now is Wells Fargo. After Congress changed what banks made off new student loans, banks like US Bancorp and JP Morgan quit the game quickly.

Now startups are leading this business, but that doesn’t mean big banks are getting totally shut out of student loan refinancing, though.

In fact they're starting to jump all over it.
...

Startups are now giving banks an opportunity to return to the student loan financing game through SLABS. SoFi CEO Mike Cagney says that every time he’s placed a SLABS offering, Morgan Stanley was involved.

Typically both it and Goldman Sachs have led the transaction.

“They were the first bank to provide warehouse financing” for SoFi in 2013, Cagney said.

Warehouse financing is what banks use to temporarily finance the loans that are refinancing before SLABS offerings are sold to new investors — usually institutional investors, like hedge funds or pensions.

Cagney says every one of his offerings has been oversubscribed, showing that investors have an appetite for every one. They’re growing in size and in frequency. Yesterday’s SLABS from SoFi took in more than $400 million. This year Cagney is looking to sell up to $2 billion in SLABS to investors, next year that could double.

And SoFi isn’t the only startup issuing new SLABS.

CommonBond just did its first SLABS offering. Unsurprisingly, Morgan Stanley was the lead underwriter and sold manager on the deal...

 

[Emily]

Goldman is downplaying the risk of the loan forgiveness plan, but as noted above, they seem to be a vested interest in this.

https://finance.yahoo.com/news/student-loan-forgiveness-gdp-goldman-100851729.html
Student loan forgiveness 'implies only a modest boost to GDP,' Goldman says

Brian Sozzi·Anchor, Editor-at-Large

Thu, August 25, 2022 at 5:08 AM