1.18. Sallie Mae is a quasi-governmental agency that packages individual student loans into pools of loans and sells shares of these pools to investors as Sallie Mae bonds.

a. What is this process called? What effect will it have on investors compared to the situations in which they could only buy and sell individual student loans?

b. What effect do you think Sallie Mae’s actions will have on the ability of students to get loans?

c. Suppose that a very severe recession hits and, as a consequence, many graduating students cannot get jobs and default on their student loans. What effect will this have on Sallie Mae bonds? Why is it likely that investors now believe Sallie Mae bonds to be riskier than expected? What will be the effect on the availability of student loans?