Student Loan Asset-Backed Securities: Safe or Subprime?

The United States alone has approximately $1.52 trillion in outstanding student loan debt, 44 million borrowers. Student loan asset-backed securities, or SLABS for short, are exactly what they sound like: securities based on outstanding student loans that investors can purchase, which deliver scheduled coupon payments much like an ordinary bond.

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Types of Assets That Back Securities. Theoretically, any asset that has a revenue stream can be transformed into a marketable debt security. In practical terms, the vast majority of ABS are collateralized by loans and other financial assets.

Definition. An "asset-backed security" is sometimes used as an umbrella term for a type of security backed by a pool of assets, and sometimes for a particular type of that security – one backed by consumer loans or loans, leases or receivables other than real estate. In the first case, collateralized debt obligations (cdo,

Coupled with the $864 billion in outstanding federal student loan debt the consumer watchdog estimated earlier this year, the $150 billion private debt load brings the total student loan toll well.

Asset-backed securities refer to investment vehicles that are based on pools of assets, or collateralized by the cash flows from a specified pool of assets, often some type of loans. When assets are pooled this way, otherwise minor and uneconomical investments can be made worthwhile, while also reducing risk by diversifying the underlying assets.

Securitized student loans-wonderfully named SLABS, for Student Loan Asset Backed Securities-are a hot commodity on Wall. including those too poor for student loans or those burdened with subprime.

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Prior to the subprime crisis, high- and low-risk mortgages were packaged together into investment bonds so that when enough of the high-risk mortgages defaulted, the bonds that had been rated as safe collapsed. similarly, one form of student debt investment security, Student Loan Asset Backed Securities (SLABS), is composed of pooled student debt.

Now You Can. Investors registered through SecondMarket already can trade student-loan securities they hold in their portfolios, said Mr. Silbert. Since 2008, about $6 billion worth has traded on the exchange, he said. The new platform will allow lenders to issue securities directly to SecondMarket’s.

Student loan asset-backed securities are a risky investment strategy for those betting on the continued growth of tuition fees and the demand stability of the secondary education market.