What is securitization?
Securitization, a subset of structured finance, is a financial technique originally developed in the U.S. housing market in the 1970s. This technique transforms illiquid (nontradable) assets into liquid assets, thereby expanding credit to a larger pool of potential borrowers. Three main characteristics are associated with this process:
- Pooling of assets such as mortgages or student loans;
- Tranching of liabilities, such as issuing bonds with varying degrees of risk that are reflected in the prices of the bonds; and
- De-linking of the risk associated with the credit pool from the originator of the credit, typically through the creation of a trust or an independent special purpose vehicle. This allows the securitization the possibility of achieving a higher credit rating than the originator of the credit.
What does securitization have to do with higher education?
The technique of securitization has so far been applied to student loans, future tuition proceeds, future dormitory proceeds, and intellectual property rights. The great majority of securitizations have so far occurred in the United States in the context of student loans. However, the technique of securitization is rapidly spreading to other parts of the world and may offer other countries the possibility of drawing on private capital to increase investment in higher education.
What information is available on securitization and its relationship to higher education?
Many documents on the field of securitization are available on the Internet, and a selection of these is listed below, along with Web sites that can provide further information. Additional sections provide specific information on the securitization of student loans and tuition proceeds.
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