With stocks, bonds and crypto struggling these days, wealth managers searching for the next investment opportunity with attractive returns may look to an unlikely alternative — student loans.
Yrefy, founded in 2017, is putting together its fourth investment portfolio of refinanced distressed private student loans that are being converted into income streams for accredited investors, who can commit at least $50,000 for one to five years. The firm charges borrowers a 5% refinance fee on its repackaging service, allowing borrowers to reapply for a new, consolidated loan with an average interest rate of 3.9% and an average loan term of 8.6 years.
Yrefy offers annualized investment yields ranging from 6.25% for a one-year investment term to 10.25% for a five-year investment term in a secured and collateralized portfolio, significantly higher than the five-year treasury rate of about 2.7%. Yrefy is able to produce such yields because while it is buying distressed loans for about 35 cents on the dollar, the borrowers are refinancing into new loans that represent 105% of the principal they initially owed.
“We decided we needed to build something that would be attractive both to the independent registered investment advisor, as well as direct consumers,” said Laine Schoneberger, chief investment officer & managing partner at Yrefy. “The financial advisor or investor can invest into any, or all, of the five individual investment tranches and can elect monthly to take interest income or compound, giving complete control to the RIA or investor.”
While both federal and private student loans being bankruptcy protected, the Biden administration
The United States alone has approximately $1.76 trillion in outstanding student loan debt from 46 million borrowers, according to government data. Despite the overall size of the student loan market, Schoneberger said Yrefy is only targeting the $21 billion slice of the private loan market that is in default, which he estimates includes about half a million borrowers.
“We have a massive market ahead of us, and it's all available to us right now,” he said.
Student loan asset-backed securities are based on outstanding student loans that deliver scheduled coupon payments much like an ordinary bond. The goal is to provide greater access for borrowers and an additional financial instrument for investors.
However, whether this industry can sustain itself will come down to whether enough borrowers can eventually pay their debt obligations. While they often comes with a higher rate of return, student loans don't come with collaterals like most mortgages, which creates default risks for investors.
“You're literally investing in the probability that a young, college-educated person isn't going to default on their loans and ruin their credit,” said Megan Kopka, owner of Kopka Financial, an RIA firm.
For indebted students, federal loans that come with relatively lower interest rates than private loans are often paid first. The Biden administration’s $10,000 student loan forgiveness is therefore likely to give private student loans borrowers a chance to pay their debts and raise their creditworthiness, despite
While opportunistic investors are betting on the continuous demand for education and universities’ pricing power to keep charging tuition that exponentially outpaces inflation, some financial advisors are still cautious about investing in student loan-related products.
“Sure, there might be some potential to get a higher rate of return as private loans exist for a reason because schools have gotten so expensive, but when we look for places to invest, we are looking for something that has stood the test of time,” Kopka said.
Jarrod G. Sandra, owner of Chisholm Wealth Management, said the risks versus returns might be unproportional.
“Student loans are unsecured, so even if I could get direct access to this as an investment, I’m not sure it’s the best place,” he said. “I would be more apt to look at high-yield, fixed-income and at least have the opportunity to be first in line in the event of default.”
