Student Loan Trust

Detailed Explanation

Student Loan Trusts are established as part of the asset-backed securities (ABS) market, where multiple student loans are aggregated into a trust and then securities, representing claims on the payments made by borrowers, are sold to investors.

These trusts are typically formed by financial institutions or government-sponsored enterprises that originate or purchase student loans. The cash flow generated from the borrowers' payments on their student loans, including both principal and interest, is used to pay the investors who hold the securities issued by the trust.

This process provides liquidity to the original lenders, allowing them to offer more loans, and offers investors the opportunity to earn returns based on the performance of the student loans within the trust.

The securities issued can vary in terms of risk and return, depending on the structure of the tranches and the credit quality of the underlying student loans.

Example

A bank that has originated numerous private student loans might pool these loans into a trust, from which it issues securities to investors. Investors buy shares of the trust, allowing the bank more capital with which to issue future loans. 

The investors receive regular payments derived from the loan repayments made by the student borrowers.

The largest student loan trust is called National Collegiate Student Loan Trust, which originally held $1.4 billion in student loans.

Key Articles Related To Student Loan Trust

• 10 Best Private Student Loan Lenders
• Cash Flow Investments: REITs And Agency Mortgages
• Investing For Dividends: How Does It Work And Where To Start

Related Terms

Asset-Backed Security (ABS): A security whose income payments and hence value are derived from and collateralized (or "backed") by a specified pool of underlying assets, such as loans.

Securitization: The process of pooling various types of debt, including FFEL or private student loans, and selling them as securities to investors.

Tranche: A portion, division, or piece of a pooled set of securities, often within an asset-backed or mortgage-backed security, that has characteristics that differentiate it from other portions.

Credit Risk: The likelihood that a borrower will default on their loan obligations, affecting the lender's ability to recover the loaned funds.

Frequently Asked Questions

Why are Student Loan Trusts created?
They provide liquidity to the student loan market, allowing lenders to recoup their funds and extend more loans.

How do Student Loan Trusts affect borrowers?
While the existence of trusts doesn't directly affect the terms of loans for borrowers, it can impact the management and servicing of loans.

Can investors lose money in Student Loan Trusts?
Yes, if the underlying student loans default at higher than expected rates, it can affect the returns to investors, especially those holding riskier tranches.

Are Student Loan Trusts related to federal student loans?
Federal student loans can be included in certain types of trusts, especially those created by government-sponsored enterprises, but most trusts involve private student loans.