Student Loan Bonds Rally as College Grads Get Jobs, Higher Pay
Bonds tied to student loans may rise more than the U.S. asset-backed securities market this year for the first time as defaults by college graduates decline.
The bonds, secured by school loans, gained 4.69 percent this year, compared with the 4.62 percent average for all asset-backed debt, securities consisting of payments on credit cards, car loans and home-equity loans, according to indexes compiled by Merrill Lynch & Co.
The number of graduates who can't keep up with their loans fell to 5.1 percent in the year ended October 2005, the second- lowest since the U.S. Education Department started tracking the number in 1987. The median starting pay for a student with a bachelor's degree rose 20 percent in the four years ending in 2004, to $50,000, according to The College Board.
Student-loan bonds ``are attractive relative to high quality unsecured corporate'' debt, said Dan Ivascyn, who oversees $30 billion in asset-backed securities at Pacific Investment Management Co. in Newport Beach, California. Ivascyn has about $1 billion invested in the bonds and is buying more, he said. Pimco is a unit of Munich-based Allianz SE.
Returns from student-loan bonds exceeded the 3.97 percent average for companies with similar ratings, Merrill Lynch index data show. About 90 percent of the bonds have Aaa ratings from Moody's Investors Service. Merrill Lynch and Moody's are based in New York.
Extra Yield
Investors get an extra 67 basis points in yield to own student-loan backed bonds rather than U.S. Treasuries, Merrill Lynch data show. That premium, or spread, is down from 84 basis points, or 0.84 percentage point, at the beginning of the year. The spread is the same for asset-backed securities on average.
A total of $175.5 billion in student loan-backed securities were outstanding at the end of June, or 8.8 percent of the asset- backed market. Reston, Virginia-based SLM Corp., or Sallie Mae, is the biggest issuer. Sales of student-loan debt rose 12 percent to $51.5 billion so far this year.
Student loans have more protection from default than other consumer debt. The majority of student loans have a federal guarantee in which the U.S. government pays back 97 percent of loans and interest that students fail to pay.
``They've performed very well and they're an asset class that conservative investors tend to use,'' said Scott Kirby, a manager of asset-backed bonds for Minneapolis-based RiverSource Investments LLC, which has $95 billion in fixed-income assets. ``The credit risk is minimal.''
Five-Year Low
The U.S. unemployment rate fell to a five-year low of 4.4 percent in October, the government said on Nov. 3. The same report showed the economy in August and September added 139,000 more jobs than it first estimated.
The unemployment rate for people 25 years and older with at least a bachelor's degree fell to 1.8 percent in August, the lowest since February, 2001, according to the U.S. Labor Department.
Employers are increasing starting salaries for college graduates, according to a survey published in September by the National Association of Colleges and Employers.
``For this year's graduates, it looks very good,'' said Andrea Koncz, a researcher for the Bethlehem, Pennsylvania-based group. ``The companies are growing, the economy is strong.''
The median debt level for a student with a bachelor's degree fell to $19,500 in 2004 from $20,400 in 2000, according to an Oct. 24 report by the College Board, which is responsible for the so-called SAT test used by college admissions offices.
The bonds, secured by school loans, gained 4.69 percent this year, compared with the 4.62 percent average for all asset-backed debt, securities consisting of payments on credit cards, car loans and home-equity loans, according to indexes compiled by Merrill Lynch & Co.
The number of graduates who can't keep up with their loans fell to 5.1 percent in the year ended October 2005, the second- lowest since the U.S. Education Department started tracking the number in 1987. The median starting pay for a student with a bachelor's degree rose 20 percent in the four years ending in 2004, to $50,000, according to The College Board.
Student-loan bonds ``are attractive relative to high quality unsecured corporate'' debt, said Dan Ivascyn, who oversees $30 billion in asset-backed securities at Pacific Investment Management Co. in Newport Beach, California. Ivascyn has about $1 billion invested in the bonds and is buying more, he said. Pimco is a unit of Munich-based Allianz SE.
Returns from student-loan bonds exceeded the 3.97 percent average for companies with similar ratings, Merrill Lynch index data show. About 90 percent of the bonds have Aaa ratings from Moody's Investors Service. Merrill Lynch and Moody's are based in New York.
Extra Yield
Investors get an extra 67 basis points in yield to own student-loan backed bonds rather than U.S. Treasuries, Merrill Lynch data show. That premium, or spread, is down from 84 basis points, or 0.84 percentage point, at the beginning of the year. The spread is the same for asset-backed securities on average.
A total of $175.5 billion in student loan-backed securities were outstanding at the end of June, or 8.8 percent of the asset- backed market. Reston, Virginia-based SLM Corp., or Sallie Mae, is the biggest issuer. Sales of student-loan debt rose 12 percent to $51.5 billion so far this year.
Student loans have more protection from default than other consumer debt. The majority of student loans have a federal guarantee in which the U.S. government pays back 97 percent of loans and interest that students fail to pay.
``They've performed very well and they're an asset class that conservative investors tend to use,'' said Scott Kirby, a manager of asset-backed bonds for Minneapolis-based RiverSource Investments LLC, which has $95 billion in fixed-income assets. ``The credit risk is minimal.''
Five-Year Low
The U.S. unemployment rate fell to a five-year low of 4.4 percent in October, the government said on Nov. 3. The same report showed the economy in August and September added 139,000 more jobs than it first estimated.
The unemployment rate for people 25 years and older with at least a bachelor's degree fell to 1.8 percent in August, the lowest since February, 2001, according to the U.S. Labor Department.
Employers are increasing starting salaries for college graduates, according to a survey published in September by the National Association of Colleges and Employers.
``For this year's graduates, it looks very good,'' said Andrea Koncz, a researcher for the Bethlehem, Pennsylvania-based group. ``The companies are growing, the economy is strong.''
The median debt level for a student with a bachelor's degree fell to $19,500 in 2004 from $20,400 in 2000, according to an Oct. 24 report by the College Board, which is responsible for the so-called SAT test used by college admissions offices.
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