Lesson 12 of 25
As the name suggests, SLABS are asset backed securities collateralized by student loans.
The majority of U.S. student loans are backed by the U.S. government, which reduces credit risk for the investor.
The most common student loans are the Federal Family Education Loan Program (FFELP) loans, which are guaranteed by the U.S. Department of Education ("DOE"). Under this program, the government provides loans to students through private lenders. These private lenders give loans to students based on their repayment capacity. They also give you the ability to consolidate student loans. In case of a default on the loans, the government will guarantee upto 95-98% of the principal plus interest payments.
The second type of loans are the non-FFELP or private sector student loans. Students use private student loans to bridge the gap between what they can borrow through federal programs and what they actually need for the education.
A government-sponsored enterprise called Student Loan Marketing Association (Sallie Mae) was created to purchase student loans in the secondary market and to securitize pools of student loans.
Prepayment risk is largely associated with defaults; the student defaults and the guarantor pays off the loan.
Student loans are commonly issued with floating interest rates, so declining interest rates might not induce prepayments from refinancing.