Nelnet, Sallie Mae and Citigroup unit Student Loan Corp. are planning term securitizations of education loans they are currently financing through Straight-A Funding, the giant commercial-paper conduit run by the U.S. Department of Education.

The offerings are expected to begin hitting the market soon, perhaps before yearend. But it's unclear which issuer would act first.

Keeping with Straight-A's funding profile, the collateral for the deals would consist of older student loans written with subsidies from the Department of Education's Federal Family Education Loan Program. The government agency launched Straight-A in April to offer temporary financing for those credits after they were excluded from other federal liquidity programs, just as weak investor demand for asset-backed bonds in general had also removed a key funding option.

The planned deals, meanwhile, would aim to capitalize on a perceived improvement in market conditions by "terming out" Straight-A's funding with the proceeds from securities with longer maturities.

The issuers' interest in seeking term-market refinancing for their Straight-A assets can be attributed largely to the results of a $434 million securitization of FFELP consolidation loans that Nelnet priced Oct. 16. The 5.4-year deal fetched a spread of 80 bp over Libor, surprising market players who thought they would go for more than 100 bp. "You don't have to look any further than the Nelnet deal," to understand the issuers' motivation, one education-lending professional said.

Bonds backed by Straight-A assets might even price at tighter spreads than the Nelnet transaction, said Guido Van Der Ven, the founder of advisory firm Education Investment Group. That's partly because the well-seasoned nature of the loans offers a strong indication of how they will perform going forward. They also have relatively short lives, suggesting deals with durations as brief as two-and-a-half years at a time when investors are showing a preference for short-dated paper.

What's more, the Straight-A pool doesn't include consolidation loans, which typically bring wider spreads than traditional FFELP credits.

In addition, spreads might benefit from an Obama Administration plan to end FFELP, as bonds backed by loans written under the program would gain "scarcity value," said Van Der Ven, who once worked at Sallie.

Either way, things are looking up sooner than had been expected only recently. While the belief all along has been that issuers would eventually refinance their Straight-A facilities through term deals, the vehicle was set up to keep rolling over its short-term funding programs over a five-year horizon - pointing to expectations of a slower recovery. "Recent market activity, particularly the Nelnet deal, caught people's attention," said John Hupalo, a managing director at Ramirez Capital who once served as chief financial officer at education lender First Marblehead. "Issuers are chomping at the bit to get back into the term ABS market."

However, there's no word on how much term paper Nelnet, Sallie and Student Loan Corp. plan to issue with assets from their Straight-A facilities. It's also unclear how heavily they rely on Straight-A for funding right now, although Sallie indicated earlier this year that it would funnel about $16 billion of loans into the vehicle.

According to Moody's, Straight-A had $25 billion of securities in the hands of investors overall at the end of August, backed by FFELP credits that the three lenders and others wrote from 2003 to 2007. That makes the entity the world's largest commercial-paper conduit. It has an overall funding capacity of $41.8 billion.

Not everyone is sold on the idea of securitizing the older FFELP loans. "If these firms could have termed it out, they wouldn't be using [Straight-A]," one rating-agency analyst said. While traditional FFELP credits were once the bread-and-butter collateral type for issuers of student-loan bonds, the various pressures facing the market have cut deeply into supply. The last time Nelnet, Sallie or Student Loan Corp. securitized such receivables was 2008, although with Nelnet's Oct. 16 issue, each has now been in the market this year with deals backed by unsubsidized "private" credits or FFELP consolidation accounts. Looking forward, it's possible some lenders could seek to securitize FFELP loans that haven't been financed through Straight-A.

Of course, the market improvement doesn't come as a total surprise. The value of student-loan paper has gradually increased along with most other types of asset-backed bonds in recent months. Five-year senior securities backed by traditional FFELP loans were trading on the secondary market this week at an average spread of 55 bp over Libor, compared to more than 300 bp a year ago.