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The only bank that stuck it out in a crucial part of the student loan game

Jun 11, 2015, 22:36 IST

SLABS are back in fashion and startups have taken the lead.

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SLABS are student loan asset backed securities. In short, it's when a student refinances a loan and a large group of those refinanced loans are packaged together and sold to investors.

The only big bank in that part of the new student loan market now is Wells Fargo. After Congress changed what banks made off new student loans, banks like US Bancorp and JP Morgan quit the game quickly.

Now startups are leading this business, but that doesn't mean big banks are getting totally shut out of student loan refinancing, though.

In fact they're starting to jump all over it.

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SLABS give banks the opportunity to cash in on student loans without having to actually write new ones.

Estimates for how much of the $1.3 trillion in student loans can be refinanced vary. But it's in the range of $150 billion to $300 billion.

And that's valuable to big banks right now, because they recently gave up on issuing new student loans.

Startups are now giving banks an opportunity to return to the student loan financing game through SLABS. SoFi CEO Mike Cagney says that every time he's placed a SLABS offering, Morgan Stanley was involved.

Typically both it and Goldman Sachs have led the transaction.

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"They were the first bank to provide warehouse financing" for SoFi in 2013, Cagney said.

Warehouse financing is what banks use to temporarily finance the loans that are refinancing before SLABS offerings are sold to new investors - usually institutional investors, like hedge funds or pensions.

Cagney says every one of his offerings has been oversubscribed, showing that investors have an appetite for every one. They're growing in size and in frequency. Yesterday's SLABS from SoFi took in more than $400 million. This year Cagney is looking to sell up to $2 billion in SLABS to investors, next year that could double.

And SoFi isn't the only startup issuing new SLABS.

CommonBond just did its first SLABS offering. Unsurprisingly, Morgan Stanley was the lead underwriter and sold manager on the deal.

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Asset backed securitization may serve as a reminder of the financial crisis, especially for big investors that were burned on them. But the startups appear to have an algorithm that goes a long way to protect against failure.

CommonBond's SLABS offering is derived only from loans made to graduate students who are more likely to repay debt. David Klein, CommonBond's CEO, points out that none of the company's refinanced borrowers have defaulted on a loan.

That no one defaults on loans are what makes SLABS offerings able to earn high ratings from firms like S&P and Moody's. All this means that startups have to continue refinancing debt from the most credit-worthy borrowers and not start taking gambles like big banks did with home loans leading up to the financial crisis.

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