Originations of student consolidation loans have gone into a deep freeze.

While lenders had already been trimming their consolidation-loan activities slightly over the past year, a convergence of rising business expenses, changing borrower habits and credit-crunch-related pressures have more recently caused production to take an even-steeper decline.

The upshot is likely to be a tremendous scaleback in overall student-loan securitizations in the months ahead, as consolidation loans had accounted for the bulk of the collateral for those deals in recent years. Indeed, just four student-loan securitizations totaling $4.6 billion have come to market this year, three from Sallie Mae. And none have been backed by consolidation loans, which borrowers use to combine multiple college debts into single obligations.

That partly reflects a scaling back of Sallie's consolidation-loan activities. In 2006, Sallie completed 10 asset-backed bond offerings totaling $33.7 billion. Nine of those deals, adding up to $31.2 billion, were backed by consolidation loans, according to the company. By 2007, five of eight Sallie deals, or $16.1 billion of a $26.8 billion total, were secured by such credits.

Nelnet, meanwhile, stopped writing consolidation loans altogether as of Jan. 28. The Lincoln, Neb., lender issued nearly $4 billion of student-loan bonds last year, a good chunk of which was backed by consolidation credits. This week, Nelnet completed its first offering of the year, a $1.2 billion issue backed by traditional credits.

"There is just very little incentive to consolidate anymore," DBRS analyst David Hartung said.

The reason for the pullback is partly rooted in the wide-ranging College Cost Reduction Act. Approved by Congress in September, the legislative package contains a requirement that companies bundling federally guaranteed student loans into consolidation credits - again with federal guarantees - pay an additional fee to the government for each of those loans.

That, combined with a reduction in government subsidies for lenders, has often made the business uneconomical. The only exceptions are the largest loans, those totaling $50,000 to $100,000. However, most borrowers are looking for far less, typically in the area of $10,000 to $15,000.

There is also a lack of incentive for borrowers to consolidate their debts these days, again because of the College Cost Reduction Act. In the past, borrowers would often seek to consolidate government-guaranteed debts because doing so would allow them to lock in fixed interest rates, as opposed to the adjustable rates attached to their original loans. Now, however, the rate for all government-backed student loans is fixed at 6.8%.

Likewise, the government has been forcing lenders to extend payment periods for certain borrowers, removing one of the key incentives for consolidating - which often comes with a payment term of 20-25 years.

The long-dated nature of consolidation loans is also creating trouble when it comes to funding the credits by issuing asset-backed securities. Bonds backed by such credits typically have durations of 10-20 years. But most investors, still bruised by losses they suffered when the structured-finance market crashed last year, only want shorter-dated products at the moment.

Most are going for student-loan bonds with lives of one to seven years, meaning they're confining their activities to traditional education credits - where production has also slipped amid the debt-market downturn.

"If you can't securitize them and don't have another vehicle to fund them, then it makes the decision to originate them very difficult," DBRS' Hartung said, referring to consolidation loans.

Overall, issuers completed $58.8 billion of student-loan securitizations last year, according to Asset-Backed Alert's ABS Database. Some $18.4 billion of those deals priced by the first week of March, placing the year-to-date slowdown at 67%.