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> Has any policy ever looked more politically dunderheaded in immediate hindsight than the Democratic Party's obsession with student loan forgiveness? Friendly

> Has any policy ever looked more politically dunderheaded in immediate hindsight than the Democratic Party's obsession with student loan forgiveness? Friendly reminder that Student Loan Asset-Backed Securities (SLABS) exist [0], and that both the loan forgiveness program and lifting the bankruptcy bans directly threaten this market. > Even before the spread of the COVID-19 pandemic, student loan debt—totaling over $1.64 trillion—was a cause for concern, as it is the second largest source of consumer debt in the United States, trailing only mortgage debt. And like collateralized mortgage debt, there is a market for collateralized student debt. Student loan asset-backed securities (SLABS) are the securitized form of student loan debt, repackaged as a marketable financial instrument. As with any investment vehicle, asset-backed securities like SLABS come with risk, particularly when borrowers default on their loans or have their debt discharged through bankruptcy proceedings. However, historically, SLABS have been a relatively sure bet—yielding consistent returns on investment—given that many student loans are guaranteed by the government and that student loan debt obligations are difficult for borrowers to escape. This is because there has been a long-standing and near-total prohibition on student loan discharge via bankruptcy proceedings. A spate of recent decisions rendered in the United States Bankruptcy Courts and two federal circuit courts of appeal could eliminate that prohibition. In turn, this decision could negatively impact the SLABS market, and in a broader sense, the United States economy. [0]: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3631953 https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3631953

financetechbro 2y ago
I’m on mobile so I’m unable to copy a quote from the paper but on page 839 the paper explains that SLABS only apply to privately issued or privately refinanced loans. I don’t know the numbers but my best guess is that the US govt holds a large number of these loans so the SLABS market is much smaller than other ABS products. Still pretty wild stuff
- JamesLeonis 2y ago
  The paper itself reports about 10% of the outstanding amount (p.840) are private. However the data is pretty hard to come by that doesn't aggregate everything. > The majority of student loans — more than $1.4 trillion — are guaranteed by the federal government — up to 97% of the principal on the loan plus interest payments — in the event that the student loan borrower defaults. This guarantee ensures that most, if not all, of the underlying collateral will be returned to the lender in the event of a borrower’s default. That said, private loans do not come with the same guarantee, but these loans represent a small proportion — around 10% — of the student loan sector. The underlying presumption that student loans are federally guaranteed—because the overwhelming majority of loans are federally guaranteed—gives rise to the misconception that most loans included in SLABS come with federal backing; however, the reality is that they do not.

financetechbro 2y ago

I’m on mobile so I’m unable to copy a quote from the paper but on page 839 the paper explains that SLABS only apply to privately issued or privately refinanced loans. I don’t know the numbers but my best guess is that the US govt holds a large number of these loans so the SLABS market is much smaller than other ABS products. Still pretty wild stuff

JamesLeonis 2y ago
The paper itself reports about 10% of the outstanding amount (p.840) are private. However the data is pretty hard to come by that doesn't aggregate everything. > The majority of student loans — more than $1.4 trillion — are guaranteed by the federal government — up to 97% of the principal on the loan plus interest payments — in the event that the student loan borrower defaults. This guarantee ensures that most, if not all, of the underlying collateral will be returned to the lender in the event of a borrower’s default. That said, private loans do not come with the same guarantee, but these loans represent a small proportion — around 10% — of the student loan sector. The underlying presumption that student loans are federally guaranteed—because the overwhelming majority of loans are federally guaranteed—gives rise to the misconception that most loans included in SLABS come with federal backing; however, the reality is that they do not.