Garnet Capital Advisors Blog

EXCERPT: The student loan space is seeing more movement with the latest transaction involving the sale of First Republic's student loan repayment business to E-Trade.

First Republic is selling its student loan repayment business to electronic trading platform E-Trade.

Student loan refinancing assets are moving about with the latest transaction involving the sale of San Francisco-based First Republic Bank's student loan repayment business to E-Trade Financial.

First Republic initially purchased Boston-based Gradifi back in December 2016. Gradifi was developed to give employers an opportunity to help their employees repay their student loan debt. Using Gradifi’s innovative technology and payment processing service, First Republic began offering as much as $100 a month in student-loan repayment to its own staff before the transaction. The response was so positive that First Republic eventually bought the company.

But three years later, First Republic is now parting ways with Gradifi in a $30 million transaction with E-Trade, which is said to boost the former's common equity by $26.8 million.

Student Loans Rise to New Levels

Today, student loans comprise over $1.5 trillion in outstanding debt in the US that is spread out among over 44 million borrowers. That number seems to be growing by the minute, with 2019's amount expanding by 6 percent from 2018 and an astounding 33 percent from 2014.

First Republic says it will still have its hand in the Gradifi student loan refinance marketplace as a lender and will still offer student loan pay-down and college save-up perks to its staff. The student loan refinancing business has brought in $2.5 billion in loans and $800 million in deposits for the bank.

Student loan assets can be a source of profits, but riskier assets in this class may be better off sold. 

Student Loan Assets an Opportunity For Some, a Source of Sell-Off For Others

Student loan asset-backed securities present an opportunity for many financial institutions. These loans are packaged into securities that can be purchased by investors that inevitably bring in regular payments in a similar way that traditional bonds do. Lenders who add these types of securities to their loan portfolios do so as a means to diversify their risk across several investors.

By packaging these loans into securities, they can then be sold to investors with the default risk spread around. In turn, lenders can hand out more loans. It's a win-win for all involved: lenders can bring in more reliable cash flow, investors can diversify their investments, and students have access to more loans.

Banks Encouraged to Make Moves Within Their Own Loan Portfolios

The recent transaction between First Republic and E-Trade serves as a reminder to all banks and lenders that revisiting their holdings and making any necessary changes is crucial to remain competitive, profitable, and able to withstand risk. Selling off any asset that may be problematic is a start. Acquiring more robust assets that have a lower risk profile in their place can further strengthen a loan portfolio.

Right now, there is a healthy market for under-performing assets, and Garnet Capital can help with the sale of such assets and the acquisition of more robust ones.

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