Wall Street Journal: S&P Affirms Some Student-Loan ABS

When the country faced the debt ceiling fiasco, AEM discussed what could have potentially happened if the U.S. defaulted on its debt. I also talked with several experts, and the analysis was grim. Then S&P downgraded us, even after we raised the debt ceiling, and it remained to be seen how that would impact student loans. That was discussed from the vantage point of the market place, i.e., how would investors respond to the downgrade, what that could potentially do to variable interest rates on student loans, and what the would mean for people seeking student loans. More importantly, however, I wanted to touch upon the way it could affect current borrowers.

The outcome still remains uncertain, but the WSJ provided some information on S&P's ratings of student loan ABS.*

According to the Wall Street Journal, despite the sovereign cut, S&P has affirmed some student loan ABS. But what does it mean that "some" have been affirmed by the agency, and not all of them? Of course, it's one agency, and one that might be in trouble for the subprime housing crisis with the DOJ. What's even worse? According to Zeke Faux and Jody Shenn at Bloomberg News, S&P " is giving a higher rating to securities backed by subprime home loans, the same type of investments that led to the worst financial crisis since the Great Depression, than it assigns the U.S. government."

The reporters added, "[the agency] is poised to provide AAA grades to 59 percent of Springleaf Mortgage Loan Trust 2011-1, a set of bonds tied to $497 million lent to homeowners with below-average credit scores and almost no equity in their properties."

Sooooooooo, let me get this straight. This company, that most likely played a role in bringing the world economy to its knees, destroying the financial security of millions of homeowners, is back at it again?!? To add insult to injury, they have downgraded the U.S., and now their going to give a triple-A rating to subprime home loans again?!? What in the f--k is going on here?!?

As for the student-loans, another agency - Fitch's (see below) - downgraded some student-loan backed securities in early July. We'll have to see what the outcome will be for the "other" loans.

I'm following this part of the story closely, talking to experts about these themes, etc. Stay tuned.

*ABS means "asset-backed securities," which were part of the now defunct FFELP program. These are loans guaranteed by the Department of Education. That means if a borrower defaults, the federal government will still pay the lender. (Sooo, I think you can see the connection here, i.e., a lenders disinterest in working with a distressed borrower? Who cares? They're gonna get the money anyway, so they have no incentive to work with struggling borrowers. Grand, right?!?) These asset-backed securities are also why Sallie Mae, Nelnet, and others lenders like to attract investors by talking about how much debt (via FFELP) they have on their books. These are seen as lucrative options for investors.

Related Links


"UPDATED: U.S. Expects Downgrade: Indentured Educated Class Officially F&$%ed!," AEM (Aug. 5, 2011)


"Quick Update: Default, The Debt Ceiling Fiasco, and Interest on Your Student Loans," AEM (Jul. 31, 2011)

"Your thoughts - The Debt Ceiling Fiasco and Student Loan Debt," AEM (Jul. 27, 2011)


"The Debt Ceiling Fiasco And Student Loans," AEM (Jul. 25, 2011)

"The Debt Ceiling: Why It's A Real Issue For The Indentured Educated Class," AEM (Jul. 25, 2011)

"Sell Those Indenture Instruments Immediately! The Debt Ceiling Disaster and Student Loans," AEM (Jul. 25, 2011)

"PHEAA - Fitch Downgrades Sub and Jr. Sub Notes for PARTS Student Loan Trust 2007-CT1," AEM (Jul. 6, 2011)

"Money Making Schemes: FFELP Loans, the Market, Sallie Mae, and Nelnet," AEM (Jul. 4, 2011)

"Steve Eisman Blasts For-Profits, Arguing 'Subprime Goes To College,'" AEM (May 28, 2010)

"In a free market world, anyone is game - even the most vulnerable," AEM (May 4, 2010)