Some lenders that deal in federally backed student loans are planning a big sale. Securities made up of or combined with student loans are set to go on the market very soon. Should governments be on the hook for federally backed loan credit sold by private businesses? Are companies once more relying on government bailouts to help should something go terribly wrong?
How these banks got the loans
Since the student loan program started, private companies have administered these loans. The government backs up these loans in case anything goes wrong, but the private business collects the money. The original theory was that this private system would get students the best personal loans. A new student loan bill changed this practice, and the federal government now administers student loans.
The student-loan backed securities
Like the subprime mortgage securities created by Wall Street, student loan securities are bundled. A grouping of loans is combined and re-split into loan-backed securities which are bought, sold and traded by investors. Since the government backs the loans, they’re considered more safe. A student loan group owned by Citibank is selling $855 million. Bank of America is preparing a similar $1.23 billion sale. Sallie Mae will also sell $1.7 billion in bonds.
Are these bonds and securities good investments?
These guaranteed loan securities are backed up by the government, so the bonds are considered very safe investments. The government and taxpayers who take on the risk of these student loan bonds, however, will not be seeing much benefit. Fortunately, it is a situation that has already been resolved — partially. The new student loan bill removes private businesses from the middleman position. At the same time, however, will the federal government continue to sell these securities? Will taxpayers see any benefit from it?
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