It's time to meet the SLABS.
Student Loan Asset-Backed Securities, or SLABS, are a way for investors to start putting their money into the student debt marketplace. With billions of dollars in this marketplace, and with the increasing questions that surround America's $1.2 trillion in outstanding student debt, it's worth taking a look at how investors put their money into student loans and what they're getting out of it.
What are SLABS?
For the layperson an asset-backed security may seem like a fairly confusing product that conjures up images of the 2008 recession and The Big Short. That's not entirely wrong, but not entirely right either. These are actually incredibly common properties in the marketplace.
An asset-backed security is an investment that pays based on revenue received from some underlying asset. While that's typically debt, such as credit card payments or auto loans, they can be built out of just about any revenue source. (Mortgage-backed securities are the same thing under a different name.) For example, movie studios have created bonds around film profits in the past. Debt is more common, though, because payments are regular and fixed, whereas profits off an asset are speculative and variable. Selling securities also helps lenders finance future loans, which encourages them to sell these products.
To create a security, a firm will typically bundle together a group of individual debts and sell pieces of that to investors, who make their money off the payments that individuals make.
So, for example, take a security backed by credit card debt. A credit card company could sell the debt of 10,000 cardholders to a financial firm. That firm will then bundle those individual debts into a security, which investors can buy shares in. As cardholders make their monthly payments, those are then distributed to the investors as their profit.