Smart Option Private Student Loans Secure $2.2 Billion in Private Education Loan Trust for SMEs

A pool comprised entirely of private student loans will underwrite the $2.2 billion SME Private Education Loan Trust, 2022-B.

Salle Mae sponsored the transaction, of which she is also a director. Sallie Mae Bank underwrote and originated all of the loans under the Smart Option Student Loan program, which do not have a US government guarantee, according to a pre-sale report from Moody’s Investors Service.

Although Smart Option loans do not have a government guarantee, they are generally granted to borrowers with higher credit quality, as evidenced by higher FICO scores and a higher percentage of co-signers. Also, part of the loans are given to students who make payments while still in school.

Moody’s noted particular credit strength: the loans are exposed to no basis risk between prime and Libor, as the loan pool does not contain prime-indexed loans, the rating agency said. .

Credit Suisse Securities is the original purchaser of notes for the transaction, which will reimburse noteholders under a senior-subordinate pro rata structure. The subordinate notes will receive scheduled and unscheduled principal recoveries once the older notes have reached their respective target improvement levels. This arrangement is likely to increase the average life of the Senior Notes and expose them to additional credit risk.

Moody’s plans to assign “Aaa” ratings to the Class A A-1A Fixed Rate Notes and the Class A-1B Floating Rate Notes, both of which have a principal amount of $871.9 million.

Moody’s noted that among environmental, social and governance (ESG) risks, social considerations pose the most risk to the transaction. Payment plans and relief programs are on the rise, especially forbearance, income-contingent payment plans and interest rate reductions, the rating agency noted. These programs increase the maturity risk in private student loan ABS.

In addition, private student loans such as those in the pool are subject to borrower relationship risks related to disclosure of service policies and deceptive or abusive practices. Such disclosures could increase litigation risks against private student loan servicers, the rating agency said.

Pool loan borrowers have a principal balance of $14,956 and their loans have a weighted average remaining term (WA) of 146 months.

Some 91.9% of Smart Option loans in the SMB 2022-B pool are co-signed, and Moody’s noted a much stronger balance sheet with these types of loans.

Smart Option loans had a cumulative default rate of 4.0% for the 2011 repayment vintage, compared to a cumulative default rate of 5.8% for Signature loans of the same vintage.