I returned from the SRI Student Loans in the Capital Markets summit and the mood was only slightly less depressing than the CBA conference earlier this year.  It is clear that there is still little action going on in the capital markets for either FFELP or private student loan product.  The conference had very few lenders present and I didn't see any schools on the attendee list.  FFELP-collateralized auction rate securities are being traded, but at between 60-80 cents on the dollar. 

Last week there was reason to cheer when the Bush Administration announced a plan for the Department of Education to purchase loans as an alternative secondary market.  The economics seem to be reasonable, as noted in Sallie Mae's investor conference call last week where the student loan giant reaffirmed their commitment to stay in the FFELP market.  Apparently this decision was an audible they called at the last minute at the line of scrimmage.

But these recent and positive moves by the Administration and Congress will only provide relief to the $80 billion annual FFELP market.  There still seems to be no solution to address the funding gaps in the $20 billion private student loan market.  Lenders have tightened their guidelines to the point where most lenders will not support a borrower whose co-signer has less than a 650 FICO score in their credit report.  Some lenders are noting that they will go as low as 620, but they don't make it clear what the cost will be to the students who receive these loans.  In all, this tightening may result in a $3-4 billion shortfall that will affect all students, but especially those who are from low income families and are attending trade and vocational schools.

We have recently witnessed efforts by some schools to attack this problem through a private lender of last resort program.  In this program schools will provide guaranties to loans in the form of loss back-stop or rate buy-down subsidies.  In some cases, schools are investing their funds directly as the lender.  This is new terrain for these schools that do not have experience managing these types of complex financial transactions. 

Many schools would prefer not to be in this business, but have found themselves forced into it due to the current market conditions.  However they don't see this business as a long term value proposition which makes it even more challenging.  How is a school with limited resources supposed to make the significant capital expenditures necessary to administer a complex and short term private lending program?

Luckily there are private student lending platforms in place today that can address these needs.  Overture's platform provides schools a turnkey platform that addresses the complete business process from start to finish.  It includes a Student Loan Marketplace that allows students to source private loan offers from participating lenders, or if no other products are available, the school-based product.  The platform ensures that all products presented to students undergo rigorous credit and pricing policy decisioning so that the loan offer is real and not an "as low as" bait and switch.  The platform includes integrations to third party servicers who can verify, certify and disburse the loan as well as service the payments on an ongoing basis.

As an independent, non-bank, third party, Overture is well positioned to facilitate a collective of schools, state agencies, and not-for-profit associations in determining a common credit and pricing policy framework for a private student lender of last resort.  These policies apply not just to core product design, but also to loan guaranty premiums.  The notion of a common lending platform is not new, it is an approach that credit unions and community banks have used in various lending business for years.  It has permitted them to achieve economies of scale and buying power that they could never achieve on their own. 

We are all watching the markets for a sign that better times are on the way and there is plenty of reason to remain hopeful.  But with the clock ticking, the time might be right for schools to explore ways they can easily and quickly adapt to these constantly shifting market conditions and be ready when the new school year begins.