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I keep hearing that the US student loan situation is a 'bubble' that is going to burst soon. Fine, but...what will that look like when it happens? I've read Mic

I keep hearing that the US student loan situation is a 'bubble' that is going to burst soon. Fine, but...what will that look like when it happens? I've read Michael Lewis's books---if you haven't, do!---and consequently I think I understand what happened during the mortgage crisis, and before that, M&A fever. But what would a student loan default crisis look like? Lenders can't exactly foreclose on college degrees. What might take the place of vacant houses in a student loan default crisis? Seriously, I would welcome any speculative economic analysis here.

hga 13y ago
What potentially happens is too many people stop playing the game, or the game many schools require. Harvard and MIT will be fine, but the schools that aren't worth $60K/year, or less for e.g. higher tier state schools other than UC Berkeley, are likely to see enrollment crashing. That's starting to happen with law schools.
cinquemb 13y ago
Since I mentioned Sallie Mae, I'll set up the situation here (and ignoring the big players who are moving out of private student loans [0]): -Sallie Mae (SM) completes its corporate split (Fed loans in one company, Private in the other) [1] -People buy shares of SM, and get paid dividends every quarter (or w/e their terms are). -As of today, 40% of Federal loans payments are being made, with $118+ billion Fed loans in their portfolio of $1+ Trillion outstanding Fed loans (so SM is probably the most statistically correlated to the total compared to others individual companies) [1][2] -As interest rates go up on loans [3], and cost of tuition goes up [4], less people will afford to make payments (regardless of if they are in school, dropped out, or un/employed) -As less people can afford to make payments, the current 40% making payments will go down (as it has untill this point under the current circumstances). -Less people making payments means less money to go around to pay dividends -lower dividends on shares means people try to sell shares. -In attempts to raise capital to pay dividends (and stabilize share value), SM will accept cash/credit in exchange of secured student loans (delaying the issue of not being able to pay dividends due to market forces in response to status quo policies) -If/When x amount of the secured loans become non performing, SM has to pay in full for the amount disclosed in the CDS deal. Rinse, wash, repeat… [0] http://www.americanbanker.com/issues/177_63/us-bank-student-lending-cfpb-1048016-1.html http://www.americanbanker.com/issues/177_63/us-bank-student-... [1] http://www.bloomberg.com/news/2013-05-31/sallie-mae-split-marks-bet-on-much-abused-private-student-loans.html http://www.bloomberg.com/news/2013-05-31/sallie-mae-split-ma... [2] http://www.cbsnews.com/8301-201_162-57597232/study-half-of-$1-trillion-federal-student-debt-unpaid/ http://www.cbsnews.com/8301-201_162-57597232/study-half-of-$... [3] http://www.reuters.com/article/2013/07/31/us-usa-studentloans-rates-idUSBRE96U1G220130731 http://www.reuters.com/article/2013/07/31/us-usa-studentloan... [4] http://money.cnn.com/2012/10/24/pf/college/public-college-tuition/index.html http://money.cnn.com/2012/10/24/pf/college/public-college-tu...

hga 13y ago

What potentially happens is too many people stop playing the game, or the game many schools require. Harvard and MIT will be fine, but the schools that aren't worth $60K/year, or less for e.g. higher tier state schools other than UC Berkeley, are likely to see enrollment crashing. That's starting to happen with law schools.

cinquemb 13y ago

Since I mentioned Sallie Mae, I'll set up the situation here (and ignoring the big players who are moving out of private student loans [0]): -Sallie Mae (SM) completes its corporate split (Fed loans in one company, Private in the other) [1] -People buy shares of SM, and get paid dividends every quarter (or w/e their terms are). -As of today, 40% of Federal loans payments are being made, with $118+ billion Fed loans in their portfolio of $1+ Trillion outstanding Fed loans (so SM is probably the most statistically correlated to the total compared to others individual companies) [1][2] -As interest rates go up on loans [3], and cost of tuition goes up [4], less people will afford to make payments (regardless of if they are in school, dropped out, or un/employed) -As less people can afford to make payments, the current 40% making payments will go down (as it has untill this point under the current circumstances). -Less people making payments means less money to go around to pay dividends -lower dividends on shares means people try to sell shares. -In attempts to raise capital to pay dividends (and stabilize share value), SM will accept cash/credit in exchange of secured student loans (delaying the issue of not being able to pay dividends due to market forces in response to status quo policies) -If/When x amount of the secured loans become non performing, SM has to pay in full for the amount disclosed in the CDS deal. Rinse, wash, repeat… [0] http://www.americanbanker.com/issues/177_63/us-bank-student-lending-cfpb-1048016-1.html http://www.americanbanker.com/issues/177_63/us-bank-student-... [1] http://www.bloomberg.com/news/2013-05-31/sallie-mae-split-marks-bet-on-much-abused-private-student-loans.html http://www.bloomberg.com/news/2013-05-31/sallie-mae-split-ma... [2] http://www.cbsnews.com/8301-201_162-57597232/study-half-of-$1-trillion-federal-student-debt-unpaid/ http://www.cbsnews.com/8301-201_162-57597232/study-half-of-$... [3] http://www.reuters.com/article/2013/07/31/us-usa-studentloans-rates-idUSBRE96U1G220130731 http://www.reuters.com/article/2013/07/31/us-usa-studentloan... [4] http://money.cnn.com/2012/10/24/pf/college/public-college-tuition/index.html http://money.cnn.com/2012/10/24/pf/college/public-college-tu...