Student Loan Asset-Backed Securities – What You Need to Know

Student loan asset-backed securities, or SLABS, are exactly what they sound like, securities based on outstanding student loans. These loans are packaged into securities that investors can buy, which deliver scheduled coupon payments much like an ordinary bond. As with any investment, there are pros and cons to SLABS, so before investing in them it’s important to know what you’re getting into – which is why you should read this post!

Student loan asset-backed securities

Student loan asset-backed securities are exactly what they sound like, securities based on outstanding student loans. These loans are packaged into securities that investors can buy, which deliver scheduled coupon payments much like an ordinary bond. This means that if you purchase SLABS, you’re essentially buying future interest payments from various student loan borrowers. Read on to learn more about these new securities, how they work and how they can benefit you as an investor or consumer of higher education services.

Student loan asset-backed securities (SLABS) are exactly what they sound like, securities based on outstanding student loans. These loans are packaged into securities that investors can buy, which deliver scheduled coupon payments much like an ordinary bond. When the borrower pays off their loan or the loans are forgiven, the issuer of the security repays the investors through the sale of additional Student loan asset-backed securities(SLABS) or by sending them new SLABS securities based on additional outstanding student loans.

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Outline

  • What are student loan asset-backed securities?
  • Their advantages
  • Their disadvantages
  • Why do SLABS exist?
  • When should you invest in SLABS?
  • Where can you invest in SLABS?

What are student loan asset-backed securities?

Student loan asset-backed securities (SLABS) are exactly what they sound like, securities based on outstanding student loans. These loans are packaged into securities that investors can buy, which deliver scheduled coupon payments much like an ordinary bond. While you might think of asset-backed securities as tools for institutional investors, they’re also a tool that some students and their families use to pay for college. Some parents and students put money into them in order to get a higher rate of return than they would get from a bank account or other financial investments such as stocks and bonds.

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Their advantages

SLABS are attractive for a couple of reasons. The biggest advantage has always been their tax status: unlike regular bonds, which investors must pay ordinary income taxes on annually, SLABS are tax-free as long as they’re held in a qualified retirement account. They’re also very easy to trade—unlike most other types of securities, which typically have to be sold through an intermediary like a stockbroker, it’s possible to buy and sell Student loan asset-backed securities(SLABS) directly from bond dealers using your bank account.

Their disadvantages

Student loan asset-backed securities are not suitable for investors who like liquidity, or who will need access to their cash within a short time frame. SLABS pays off over a long period of time (10 years or more), which means that you’ll have plenty of time to take money out if you need it, but also that you’ll be stuck in an investment that doesn’t grow as quickly as others.

Why do SLABS exist?

The last few years have been good for SLABS investors. The average coupon rate on these securities has increased from around 2.5% before 2013 to almost 5% today. As with any investment, though, it’s important to consider whether these securities make sense for your portfolio and goals. Here are a few things you should keep in mind before investing in SLAB.

When should you invest in SLABS?

Interest rates on student loans are generally lower than other types of debt (10-year Treasury bonds, for example). However, there is also more volatility: historically, interest rates have fluctuated between 5 and 20 percent. Student loan asset-backed securities are attractive if you’re willing to bet that interest rates will continue falling; however, if interest rates rise again it could be disastrous for SLABS investors. If you decide that investing in SLABS is right for your portfolio and you want some exposure, consider hedging against rising rates with treasuries or corporate bonds. Finally, keep an eye on legislative developments regarding student loans. The fate of student loan asset-backed securities could be very different depending on what kind of legislation Congress passed in 2017 and beyond.

Where can you invest in SLABS?

While SLABS are not yet common, they’re increasingly popular. And it’s not hard to see why: SLABS offers investors a way to invest in one of America’s fastest-growing market segments while taking advantage of securitization. Both student loan debt and asset-backed securities have been increasing at double-digit rates year after year and as more people go back to school (particularly during a recession), both numbers are expected to continue their climb. Investors can purchase SLABS through several brokerages and trading platforms as well as directly from some lenders who use banks for capital markets. If you’re considering investing in SLABS, be sure you fully understand how each potential investment works before committing any funds!

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