Private student loan organizations do not have the same role in the industry as in the past, but they occupy a valuable space in the market fueled by their service to students, families, schools, and educators and will continue to do so for many years to come — specifically, nonprofit and state agency student lenders.
These organizations are municipal public-purpose entities with the mission of increasing postsecondary education access, affordability and success. They operate as loan issuers, servicers and secondary market participants. Many have the unique capability of issuing both tax-exempt and taxable student loan bonds in the municipal market with access to private-activity bond caps.
Nonprofit and state agency student loan organizations issued muni bonds to fund federally guaranteed student loans under the Federal Family Education Loan Program until 2010, when the program was terminated with the passage of the Health Care and Education Reconciliation Act. These entities continue to service and manage remaining portfolio volume, and some originate private student loans financed through municipal bond deals.
The student loan muni bond market consists of refinancings and restructurings of FFELP-backed bonds as well as new-money deals with private student loan-backed bonds. Total private student loan issuance this year will total about $7 billion, with $1 billion attributable to student loan muni bonds. At their peak in 2007-2008, private student-loan originations equaled around $20 billion.
Loan origination decreased drastically due to tighter underwriting and lending criteria, which in turn caused more competition among high-quality lenders and servicers. In addition, private student loans are generally more difficult to finance as they are seen as more risky by rating agencies and investors due to long loan terms, no government guarantee, and a relatively small marketplace.
However, nonprofit and state agency issuers enjoy an advantage among other lenders with access to both taxable and tax-exempt financing in the municipal markets.
Loans issued by nonprofits also have about half the default rate of others in the industry, as recognized by the Consumer Financial Protection Bureau in its report to Congress on the private student loan market. They require higher FICO scores, loan co-signers and appealing pricing to attract increased investor interest.
Most nonprofit alternative student loan programs offer low, fixed-interest rates far below that of the federal PLUS loans along with positive repayment incentives, flexible repayment plans and financial literacy programs.
As municipal issuers, nonprofit and state agency student lenders are concerned about the impact of many of the same rules and provisions of the Dodd-Frank Act as others in the market. Of particular concern is the muni advisor registration rule being crafted by Municipal Securities Rulemaking Board's and Securities and Exchange Commission. The Dodd-Frank Act mandates that municipal securities advisors register with both the SEC and MSRB.
Under the proposed rule, members of boards of directors of nonprofit and state agency student lenders would be required to register as municipal advisors, subjecting them to duplicative fiduciary duty. As instrumentalities of their states, many student lenders have boards of directors appointed by a state legislature or executive, thereby already subjecting them to state laws and duties of loyalty, similar to those created by the municipal advisor registration rule.
The increased regulatory red tape would likely inhibit people from serving on such lenders' boards, potentially hampering business operations. Student loan muni issuers are hopeful that regulators will grant an exemption for appointed members of state and local governing bodies from registration requirements in the final rule.
Regardless of increased regulatory oversight and other legislative obstacles, student loan bonds will continue to play an active role in the municipal market as the cost of college continues to rise, federal aid remains stagnant and the gap for financing higher education grows. Nonprofit and state agency alternative-student loans will continue to fill the funding gap for students and parents, while providing an asset class with uniquely attractive features for muni investors.
Vince Sampson is president of the Education Finance Council. Samantha DeZur is the EFC's vice president of communications and industry relations.