Student Loan Debt Sales Fall 65 Percent as Lenders Exit Market

By Sarah Mulholland

April 2 (Bloomberg) -- Sales of bonds backed by student loans have dropped 65 percent this year compared with the first quarter of 2007 as lenders exit the business, according to a report from UBS AG.

Investor demand for student-loan bonds has dried up, making it more costly for lenders to sell them. Concern over the effect a potential U.S. recession may have on students' ability to repay loans is partly to blame for the decrease in issuance, the UBS analysts led by Laurie Goodman in New York said.

``Decline in volume is typically expected in credit crunch scenarios, as underwriting standards are tightened across the board and it becomes harder for consumers to obtain credit,'' the analysts wrote.

Legislative changes enacted in September of last year have also increased the costs for student loan companies to originate new loans under the Federal Family Education Loan Program. FFELP loans are partially guaranteed by the U.S. Department of Education. A total of 27 lenders have suspended or cut back on FFELP loan production, the analysts said.

The cost for student loan companies to finance in the asset- backed market has increased ``over the last few months,'' the UBS analysts said. Nelnet Inc. raised $500 million in a sale of debt backed by student loans on March 31. The AAA portion of the sale with a three-year maturity priced to yield 100 basis points over the three-month London interbank offered rate. The Lincoln, Nebraska-based student loan company sold AAA bonds with a 3.25- year maturity on March 5 priced to yield 85 basis points over three-month Libor.

Asset-backed securities are bonds backed by receivables such as payments on student loans, car loans and credit cards. UBS is based in Zurich.

To contact the reporter on this story: Sarah Mulholland in New York at smulholland3@bloomberg.net

Last Updated: April 2, 2008 12:07 EDT

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